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Summary
Trump-appointee Warsh taking over as Fed chair could have far-reaching consequences for the global economy. Will the Fed take a dovish or hawkish turn on inflation? Will its independence survive? Other central banks will be watching with bated breath.
With the confirmation of Kevin Warsh as chair of the US Federal Reserve by the Senate, the curtains come down on one of the world’s most talked-about appointments.
He takes over on Friday from Jerome Powell, whose term has been both momentous (think covid) and tempestuous (recall his run-ins with US President Donald Trump on rate policy); and at a time when the central bank’s independence is being severely tested.
Trump has tried—in vain so far—to exert influence over the Fed. He even pushed for a probe by the US justice department of Powell’s handling of a Fed building renovation project. The investigation has since been dropped, most likely to ease Senate approval.
Powell, though, has vowed to stay on at the Fed (his term on its board ends in 2028) until that probe is truly over, saying he is worried about “the series of legal attacks on the Fed which threaten our ability to conduct monetary policy without considering political factors.”
Warsh’s views on monetary policy are a bit of a mystery. Seen as an inflation hawk during his previous term on the Fed’s board, he appears to have softened his stance since, perhaps to align it with Trump’s.
The White House, of course, has made no bones about wanting rate cuts. Asked recently if he expects to see lower interest rates, Trump reportedly retorted, “When Kevin gets in, I do.” The White House appointee, however, has kept his cards close to his chest. So far.
As chair, Warsh has only one of 12 votes on Fed funds rate decisions and is only one of 19 experts on broader policy. This is unlike the Reserve Bank of India governor, who has considerable power over its rate-setting panel. Powell staying on as a member of the Fed’s board would also limit Warsh’s ability to chart a different course, be it on short-term rates—the central bank has been on pause for three consecutive meetings—or the larger issue of going by Fed analysis or White House diktat.
Notably, Warsh has spoken of “regime change” at the Fed, including tighter coordination with the Trump-led US administration on non-monetary policies. He has also expressed a dim view of the Fed’s bloated balance sheet, a remnant of furious bond-buying for ‘quantitative easing’ during the covid years. The Fed’s total assets had gone above $8.9 trillion in mid-2022 and have fallen to about $6.7 trillion since then.
If this pile is reduced by means of heavy bond selling in addition to runoffs (i.e., letting bonds mature), it would push market prices down and yields up for longer tenure paper. Even if the overnight policy rate is held firm, that could put the Fed in conflict with Trump’s desire to see cheaper credit in general.
It will be a while before Warsh reveals his cards. The first meeting of the US central bank’s rate-setting committee with him at its helm is slated for mid-June. In truth, he is caught between a rock and a hard place; US inflation in April was 3.8%, the highest since May 2023 and likely to go higher as the US-Iran stalemate over the Strait of Hormuz persists, even as America’s GDP growth remains satisfactory by US standards (2% in the first quarter of 2026, annualized, up from 0.5% the previous one).
Economics 101 would ask for a rate hike, while Politics 101 pushes for the opposite. Which way the Fed turns under its new chief will matter enormously for the global economy, India’s included.
English (US) ·