Kevin Warsh faces his first serious test as head of the Fed. This week, he will hold a meeting where the regulator will decide what to do with interest rates in the U.S..
The market is not expecting surprises yet. According to FedWatch by CME, investors expect the rate to remain in the range of 3.5–3.75%.
Futures also show that market participants do not expect the next rate cut before March 2027. The reason is strong employment data and inflation at 4.2% year over year. The last time this figure was seen in the U.S. was about three years ago.
Fed Officials May Get Tougher Because of Inflation
In its previous statement, the Fed hinted at the possibility of a more dovish policy. But now that signal may be removed.
At the April meeting, three heads of regional reserve banks opposed such wording. Now, keeping it would be more difficult. The labor market remains strong, and prices are rising faster again.
There is also the oil factor. Last week, prices fell slightly on expectations of de-escalation around Iran. But oil is still significantly more expensive than before the conflict began. And expensive oil quickly hits transportation, production, and household spending.
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If Warsh tries to smooth out these risks or maintains a dovish tone, it may be seen as a concession to Donald Trump. It was Trump who nominated him as head of the Fed and has long demanded lower rates.
Previously, Trump publicly pressured Jerome Powell, criticizing him for refusing to cut rates. For American politics, this was a notable departure from the tradition where presidents tried not to interfere directly in the central bank’s work.
This topic also came up for Warsh during his confirmation hearings. Senators asked whether he could maintain the Fed’s independence and not be guided by Trump’s position.
The first meeting and press conference will give the market its first answers. Most likely, the majority of Fed members will support keeping the rate unchanged. This matches the latest employment and inflation data.
At the same time, Warsh is not completely dependent on the White House. Removing the head of the Fed over a rate dispute is extremely difficult. Pressure on Powell and board member Lisa Cook previously led to nothing.
This gives Warsh room to maneuver. He can prioritize financial stability over short-term political demands.
Warsh’s Past Views Raise Questions for the Market
Over the past year, Warsh has increasingly spoken about the possibility of rate cuts. He explained this in part by the development of artificial intelligence. In his view, AI can help businesses cut costs and thus contain inflation.
He also referred to certain inflation indicators that showed weakening price pressures.
Such rhetoric fit well with Trump’s position, who has long advocated for cheaper money. This likely helped Warsh get the Fed chair position.
But his past statements look less clear-cut. After the financial crisis, during Barack Obama’s presidency, Warsh advocated for raising rates. He also criticized the Fed for being too aggressive in buying government and mortgage bonds.
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Later, during Trump’s first term, Warsh together with his former employer Stanley Druckenmiller opposed tightening policy. And this was despite very low unemployment.
There was another episode. In September 2024, when the Fed under Joe Biden cut rates after inflation cooled, Warsh called the decision strange.
Even if he keeps policy away from the Fed’s decisions, the task is still not easy. Inflation was a problem even before the oil price spike due to Iran. And the impact of AI on the economy is still not fully understood. It may reduce company expenses but at the same time hit employment and demand.
Warsh also advocates for reducing the Fed’s balance sheet, which exceeds $6.7 trillion. This approach could remove some liquidity from the market, especially amid instability in U.S. government bonds.
In addition, he has long criticized the Fed’s forward guidance and wants to do away with the dot plot. These are committee members’ forecasts for the future rate path.
For the regulator itself, this step would give more freedom. But investors would lose an important benchmark by which they assess future Fed decisions.
Warsh believes that the previous Fed leadership relied too much on old data and underestimated trust in the institution. Now the market will have to see whether his approach to rates, the balance sheet, communication, and independence will work.
