By Nicole Goodkind
Every incoming Federal Reserve chair inherits an economy. Kevin Warsh, President Donald Trump's pick to next run the central bank, will also inherit a conflict.
The White House expects the Fed to lower interest rates, while the policymakers that Warsh may soon lead have just signaled that further easing is unlikely without firmer proof that inflation is under control.
Inside the Fed, the mood has turned hawkish, indicating a bias toward more restrictive monetary policy. Minutes from the January meeting show broad agreement around holding the federal-funds rate at 3.50% to 3.75% for some time, following last year's three rounds of easing. But several participants noted that they would have preferred language that kept rate hikes explicitly in play, should inflation remain above target.
Officials assessed that downside risks to employment had moderated, while the risk of inflation proving more persistent still loomed.
"This sets up an interesting dynamic," says EY-Parthenon Chief Economist Gregory Daco. "While Warsh may enter with a perceived dovish bias, he will first need to demonstrate that his views are anchored in economic fundamentals rather than politics. He would then need to persuade a committee that appears increasingly hawkish and comfortable with policy near neutral."
The economic data have given officials little reason to hurry. Payrolls rose by 130,000 in January and the unemployment rate edged down to 4.3%. Hiring remains uneven, but layoffs are low and jobless claims are far from flashing recession signals.
Inflation, meanwhile, continues to run well above the Fed's 2% goal, with the latest reading of the central bank's preferred inflation gauge coming in at around 3%. Core service prices also remain sticky. Nothing in that mix pushes policymakers toward immediate relief.
Warsh has described a different trajectory. Productivity gains from artificial intelligence, deregulation, and capital investment, he has argued, could allow inflation to recede without an economic downturn, allowing for a quick succession of rate cuts. That argument dovetails with Trump's insistence that rates are far too high and should come down immediately. Warsh's nomination has been widely interpreted as an effort to move the central bank in that direction.
But the Fed chair governs by persuasion, not decree. Policy is set by vote, and most members of the Federal Open Market Committee, which sets interest-rate policy, don't buy Trump's or Warsh's argument. The FOMC has instead signaled its reluctance to cut. Several officials have warned that easing prematurely could revive price pressures or erode public confidence in the Fed's resolve.
Navigating this situation would test any incoming chair. Pressing for cuts before the data justify them would risk reinforcing the perception that the central bank is yielding to political pressure. Aligning with a hawkish committee, however, would frustrate a president who has never hidden his displeasure with tight policy.
Current Chair Jerome Powell, whom Trump placed into power, has repeatedly endured the president's public scorn. There is little reason to assume a successor would be shielded from similar pressure if rates remain elevated.
Rate cuts later this year remain possible. A steady resumption of disinflation or a weakening in the labor market would alter the committee's calculus. Also, Warsh may be able to persuade his colleagues that productivity gains are pushing prices lower than traditional models capture. The Supreme Court's ruling against tariffs could also lower the inflation rate over time, but that is still to be determined. For now, expectations alone won't move the committee.
Even Warsh's transition to chair is facing conflict, and Senate confirmation isn't assured. Republican Sen. Thom Tillis has said he won't move the nomination forward until an investigation into Powell's testimony last year regarding cost overruns on a renovation of the Federal Reserve's headquarters is dropped. Democrats, meanwhile, are preparing their own scrutiny.
Also, Powell could remain on the Board of Governors after his time as chair expires, taking on a shadow chair role that could lead to an internal power struggle.
If inflation doesn't fall quickly enough to justify interest-rate cuts, Warsh will face a choice between siding with the committee he leads or the president who selected him. His decision could define his tenure.
Write to Nicole Goodkind at nicole.goodkind@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
By Nicole Goodkind
Every incoming Federal Reserve chair inherits an economy. Kevin Warsh, President Donald Trump's pick to next run the central bank, will also inherit a conflict.
The White House expects the Fed to lower interest rates, while the policymakers that Warsh may soon lead have just signaled that further easing is unlikely without firmer proof that inflation is under control.
Inside the Fed, the mood has turned hawkish, indicating a bias toward more restrictive monetary policy. Minutes from the January meeting show broad agreement around holding the federal-funds rate at 3.50% to 3.75% for some time, following last year's three rounds of easing. But several participants noted that they would have preferred language that kept rate hikes explicitly in play, should inflation remain above target.
Officials assessed that downside risks to employment had moderated, while the risk of inflation proving more persistent still loomed.
"This sets up an interesting dynamic," says EY-Parthenon Chief Economist Gregory Daco. "While Warsh may enter with a perceived dovish bias, he will first need to demonstrate that his views are anchored in economic fundamentals rather than politics. He would then need to persuade a committee that appears increasingly hawkish and comfortable with policy near neutral."
The economic data have given officials little reason to hurry. Payrolls rose by 130,000 in January and the unemployment rate edged down to 4.3%. Hiring remains uneven, but layoffs are low and jobless claims are far from flashing recession signals.
Inflation, meanwhile, continues to run well above the Fed's 2% goal, with the latest reading of the central bank's preferred inflation gauge coming in at around 3%. Core service prices also remain sticky. Nothing in that mix pushes policymakers toward immediate relief.
Warsh has described a different trajectory. Productivity gains from artificial intelligence, deregulation, and capital investment, he has argued, could allow inflation to recede without an economic downturn, allowing for a quick succession of rate cuts. That argument dovetails with Trump's insistence that rates are far too high and should come down immediately. Warsh's nomination has been widely interpreted as an effort to move the central bank in that direction.
But the Fed chair governs by persuasion, not decree. Policy is set by vote, and most members of the Federal Open Market Committee, which sets interest-rate policy, don't buy Trump's or Warsh's argument. The FOMC has instead signaled its reluctance to cut. Several officials have warned that easing prematurely could revive price pressures or erode public confidence in the Fed's resolve.
Navigating this situation would test any incoming chair. Pressing for cuts before the data justify them would risk reinforcing the perception that the central bank is yielding to political pressure. Aligning with a hawkish committee, however, would frustrate a president who has never hidden his displeasure with tight policy.
Current Chair Jerome Powell, whom Trump placed into power, has repeatedly endured the president's public scorn. There is little reason to assume a successor would be shielded from similar pressure if rates remain elevated.
Rate cuts later this year remain possible. A steady resumption of disinflation or a weakening in the labor market would alter the committee's calculus. Also, Warsh may be able to persuade his colleagues that productivity gains are pushing prices lower than traditional models capture. The Supreme Court's ruling against tariffs could also lower the inflation rate over time, but that is still to be determined. For now, expectations alone won't move the committee.
Even Warsh's transition to chair is facing conflict, and Senate confirmation isn't assured. Republican Sen. Thom Tillis has said he won't move the nomination forward until an investigation into Powell's testimony last year regarding cost overruns on a renovation of the Federal Reserve's headquarters is dropped. Democrats, meanwhile, are preparing their own scrutiny.
Also, Powell could remain on the Board of Governors after his time as chair expires, taking on a shadow chair role that could lead to an internal power struggle.
If inflation doesn't fall quickly enough to justify interest-rate cuts, Warsh will face a choice between siding with the committee he leads or the president who selected him. His decision could define his tenure.
Write to Nicole Goodkind at nicole.goodkind@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
February 21, 2026 09:29 ET (14:29 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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