During Kevin Warsh’s swearing-in as chair of the Federal Reserve, President Donald Trump told the new chair to be “independent” and “don’t look at me, don’t look at anybody, just do your own thing and do a great job.”
That’ll soon be put to the test.
Warsh will probably need to deliver unwelcome news to Trump after his first meeting as Fed chair, as markets expect no change in the central bank’s benchmark interest rate despite Trump’s consistent calls for lower borrowing costs.
The Fed typically lowers rates in response to concerns about the labor market to make borrowing cheaper and help stimulate the economy. Generally, it raises them in response to rising inflation to curb spending and guide prices down. Policymakers hold them steady when they feel they are in a good place or when they’re waiting on more data to make a decision.
Economists say solid job gains and rising inflation tied to the Iran war over the past three months have left little room for policymakers to cut. While the president said this month that there is “no reason” to raise interest rates, in recent weeks traders have shifted their expectations away from cuts and toward possible rate hikes later this year or in early 2027.
“For the Fed to cut rates, they would likely need to see some new negative shock to the job market, whether that be worsening of the Mideast conflict or some of the potential downside risks to employment from AI being realized,” Comerica Bank Chief U.S. Economist Bill Adams told USA TODAY. “If that doesn’t happen, the Fed will have a hard time justifying a rate cut in the current environment.”
Forecasters expect policymakers to maintain their target for the federal funds rate at a range of 3.5% to 3.75%, as they have so far this year, after their next two-day meeting beginning June 16.
Warsh served as a Fed governor from 2006 to 2011, when he earned a hawkish reputation – meaning he focused more on taming inflation through higher rates. But as a nominee, he made a case for lower borrowing costs, predicting AI-driven productivity gains and a smaller Fed balance sheet could serve as disinflationary forces.
Today, “I don’t think anybody knows what Kevin Warsh’s true reaction function is,” said Darius Dale, founder and CEO of macro-research firm 42 Macro.
The second unknown, Dale added, is how receptive his colleagues on the Federal Open Market Committee will be to his “vision” for the central bank. During his Senate confirmation hearing, Warsh said the institution hadn’t “delivered” on its promises.
“Recall, he’s been basically lambasting them for years and criticizing them in a way that I think would make it really difficult for him to lead this institution,” Dale said. “These guys are all professionals, and I think, generally speaking, they want good outcomes for the American public, but they’re still human beings. Now, their new boss is somebody who’s been criticizing them publicly for years.”
Dale also highlighted two of Warsh’s key teachers – Stanley Druckenmiller and the late Milton Friedman.
“He’s learned economics from two of the smartest economists in world history, and they have very different views on how the economy functions” relative to current FOMC members, Dale said. “He’s going to be talking about things that we just haven’t heard a central banker in America talk about for decades.”
Warsh has also advocated for less forward guidance at the Fed.
“Everyone kind of expects him to be less communicative than not just Powell, but the last three chairs,” Thrivent Chief Financial and Investment Officer David Royal said. “So, is he going to be sort of evasive, which could unsettle markets a little bit over the longer term?”
When measuring inflation, the Fed typically prefers to look at the Bureau of Economic Analysis’ Personal Consumption Expenditures (PCE) Price Index. Its latest release showed PCE rose 3.8% over the year in April. Core PCE, which strips out volatile food and energy costs, rose 3.3% over the year.
It also looks at the Consumer Price Index, which, according to the Labor Department’s latest report, shows prices rose 4.2% over the year in May, driven by surging gasoline costs and reflecting the sharpest jump in three years. Core CPI inflation rose 2.9% over the year last month. However, in May, core CPI rose only 0.2%, a slower rate than the 0.4% increase seen in April – and perhaps a sign that higher fuel costs weren’t dramatically raising the cost of other goods.
Warsh has signaled a preference for another measure known as “trimmed mean PCE inflation,” which excludes extreme outliers before taking a weighted average. It rose 2.3% over the year in April.
Boston College economics professor Brian Bethune said that trimmed mean PCE isn’t the most reliable indicator right now. Put simply: It works best when inflation shocks behave similar to the 2009-2019 period, prior to the COVID-19 crisis in 2020, when there was a better balance between positive and negative shocks. But when price shocks are predominantly positive due to supply shocks, tariffs, oil spikes, or major unusual sporting events, like the World Cup, it will understate inflation.
“So, hopefully somebody will call him out on that,” Bethune said.
No matter what index forecasters are looking at, inflation remains above the Fed’s 2% target, as it has since the spring of 2021.
The Fed’s Beige Book will also help inform policymakers’ next rate decision. It’s a report that provides information on economic conditions across the Fed’s 12 districts.
The latest Beige Book released June 3 signaled that while wage growth is largely in line with inflation, firms are absorbing higher input costs to preserve customer demand – something that usually happens when businesses feel consumers cannot afford further price increases.
Americans appear to agree. The University of Michigan’s measure of consumer sentiment fell to an all-time low in May as 57% of respondents said high prices were “eroding their personal finances,” according to Surveys of Consumers Director Joanne Hsu.
The Beige Book also signaled that data center demand is leading to additional hiring in manufacturing, but that other sectors remain in a “low-hire,” “low-fire” environment.
While the leisure and hospitality sector saw a boost in hiring in the Labor Department’s May jobs report released June 5, Bethune said that is probably being driven, in part, by a temporary increase in summer hiring tied to the World Cup. The healthcare and social assistance industries continue to be reliable engines of job growth.
Warsh has stepped in to lead the central bank at a moment when its independence from politics has been called into question. Maintaining the institution’s credibility will be part of his job.
Trump nominated former Fed chair Jerome Powell to the role in 2017. Trump’s criticism of Powell started shortly after Powell became chair. When Trump retook the White House, the criticism started up again. The president lobbed insults at the Fed chair and the two clashed over the budget for a multibillion-dollar renovation project at the Fed’s Washington headquarters.
That project ultimately led to a Department of Justice probe into Powell that former Fed chairs called “an unprecedented attempt to use prosecutorial attacks to undermine” the central bank’s independence. Powell himself condemned the investigation in a rare statement. The DOJ dropped the probe in April.
Powell is still on the Fed’s board of governors.
Last year, Trump also attempted to fire Fed Governor Lisa Cook over allegations she committed mortgage fraud in 2021. Cook denied any wrongdoing and challenged the move in court. The Supreme Court heard oral arguments in the case in January but has yet to issue a ruling.
Reach Rachel Barber at rbarber@usatoday.com, follow her on X @rachelbarber_, and subscribe to her newsletter “Making More of Your Money” here.
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