The Perfect Storm – Kevin Warsh’s Impossible Task as the Incoming Fed Chair

When a confirmation hearing begins to resemble a public trial rather than a job interview, a certain type of political theater takes place in Washington. On April 21st, Kevin Warsh participated in one of those, answering questions about everything from interest rate philosophy to his name showing up in Jeffrey Epstein’s files. He responded in a composed, almost cautious manner, as if he knew that the room was searching for a crack. Regardless of the Senate’s decision to confirm him, one thing is certain: Warsh’s position at the Federal Reserve is, by all reasonable standards, incredibly challenging.

Warsh is up against more than just political obstacles. It is structural, economic, and nearly paradoxical. He used Alan Greenspan’s definition of price stability, one of the Fed’s two primary mandates, during the hearing: inflation at the point where it is no longer a topic of discussion. Actually, it’s a meaningful definition. Not a figure on a spreadsheet, but an actual perception that prices are no longer a major topic of discussion at the kitchen table. The issue is that Americans are currently discussing inflation all the time. This month, consumer expectations for inflation increased by a full point to 4.8%, the highest level in seven months. Input prices are at their highest point since 2022. The Fed isn’t close by Warsh’s own standards.

The oil shock comes next. Whatever rate strategy Warsh may have been quietly sketching on paper was complicated by the Iran conflict, which drove headline inflation well above the Fed’s 2% target. He might inherit a situation where lowering rates, which Trump publicly wants to happen right away, would exacerbate an already raging situation. On the other hand, raising rates puts the economy at risk of slowing down at a politically delicate time. There’s a feeling that someone significant will be enraged no matter which way Warsh goes first.

Before Warsh even entered the hearing room, President Trump made his stance clear by telling CNBC that morning that he would be disappointed if his new Fed nominee didn’t immediately lower borrowing costs. To his credit, Warsh remained unflinching. He claimed that Trump never asked him to commit to a rate decision and that even if he were asked, he wouldn’t. Never one to back down, Senator Elizabeth Warren put it bluntly when she said that Warsh would be Trump’s “sock puppet.” He refuted it. However, the existence of this framing and the fact that it’s a serious question being asked during a Senate hearing reveal something about the tightrope the man is getting ready to walk.

Beyond politics, Warsh has expressed sincere aspirations within the Fed. He has discussed what he refers to as “regime change”—a revision of the methods used to measure inflation, communicate policy, and manage the balance sheet, which currently stands at $6.6 trillion. These are not trivial concepts. In a piece for Project Syndicate, Barry Eichengreen pointed out that while Warsh’s obsession with moral hazard—the possibility that a bloated Fed balance sheet encourages careless bank behavior—is valid, there is also a risk of financial instability in the event that the unwinding goes awry. Warsh appears to be conscious of the tension. It remains to be seen if his awareness results in efficient navigation.

Even though you’re skeptical of the man, it’s difficult not to feel some sympathy for the position as you watch this play out. The president who now wants his successor to take immediate action on rates has publicly attacked Jerome Powell for years. The Fed’s decades-long credibility depends on it refraining from doing that. Warsh is aware of this. Under oath, he stated as much. However, there is a big difference between knowing something and experiencing it under presidential pressure for four years. Already, the storm is building. The question is whether Warsh is built for this kind of weather, not if he will encounter it.