The room seemed to tighten at one point during Kevin Warsh’s confirmation hearing back in April. He was asked if he would effectively be Donald Trump’s “sock puppet” at the Federal Reserve by Senator Elizabeth Warren, who leaned forward with the prosecutorial poise she had developed over the years. With a straight back and a dark suit on, Warsh responded bluntly, “Absolutely not.” The words lingered in the air longer than they ought to have. As senators moved in their leather chairs, you could practically hear the water pitchers of the Senate Banking Committee clinking. When one sentence completely changes the context of a hearing, it is difficult to ignore.
It wasn’t really about Warsh’s resume during the hours-long hearing on Capitol Hill. He has experience as a Fed governor and is familiar with the structure and customs. It concerned the type of central bank that the United States wants for the next ten years and whether Trump’s choice would uphold the country’s independence or subtly transfer power. Only Senator John Fetterman crossed party lines in the 54-45 confirmation vote that took place weeks later, indicating that the majority of the Senate had already decided which version of Warsh they supported.
Warsh, 56, is no stranger to discussions about money. Since he resigned as governor in 2011 due to bond-buying, he has spent twenty years writing opinion pieces, giving speeches, and producing podcasts about everything wrong with the Fed. Even his detractors subtly acknowledge the consistency of his framework. A smaller balance sheet is what he desires. He seeks “regime change” within the organization. He discusses credibility in the same way that traditional bankers discussed gold. However, observers continue to draw attention to one inconvenient fact: Biden was advocating for rate increases in 2024. Suddenly, he has been singing along with rate cuts under Trump. Trading desks from Chicago to Frankfurt have taken notice of this change.
Trump most likely didn’t envision the world that Warsh will inherit when he is sworn in this morning at the White House. The Iran war, the closure of the Strait of Hormuz, tariffs that never really eased, and now the peculiar new pressure of AI data centers consuming electricity in places like Phoenix and northern Virginia have all contributed to inflation rising back to 3.8% in April from 2.4% in February. For over five years, the Fed has failed to meet the 2% target, which it once regarded as scripture. Bond traders have begun to bid higher yields because they are more likely to vote with money than with opinions. A year after hinting at rate cuts, the CME FedWatch tool now subtly suggests the opposite.
As this develops, there’s a feeling that Warsh’s initial months might not resemble his confirmation pitch at all. In other words, he told the senators that “inflation is the Fed’s choice.” However, he faces a harsh decision: either raise rates and publicly oppose the president who personally chose him, or watch as his reputation as an inflation hawk—which he has spent twenty years cultivating—dissipates in his first quarter of office.
Warsh might have figured this out already. He is cautious, has a temperament more suited to a lawyer than an economist, and is knowledgeable about optics. However, Trump is not known for his patience; he told CNBC that he would be “disappointed” if Warsh didn’t lower rates right away. Warsh’s first meeting as chair, scheduled for June 16–17, will be viewed in the same manner as Volcker’s initial actions in 1979. At that meeting, markets are not anticipating fireworks. Very few are. Tone, signals, and the subtle choreography of dissent on the FOMC are what they are observing.
Walking past the marble columns of the Eccles Building these days gives one the impression that something is changing that is difficult to reverse. The next ten years of American money may already be taking shape in ways that even Warsh cannot completely control, regardless of whether he turns into the disciplined hawk he claims to be or the accommodating loyalist his detractors fear.
