By Matt Grossman and Peter Santilli
Kevin Warsh won the Fed chair nomination with a double-barreled policy agenda for the central bank: lower interest rates and a smaller Fed balance sheet. As he takes the reins, economic conditions will make it tough for him to achieve either of those goals.
A troubling rise in inflation over the past two months has left Fed policymakers in no mood to deliver the rate cuts that President Trump has demanded. The job market has shown signs of stabilizing, further undercutting the case for easing.
Warsh's other aim, a smaller Fed presence in financial markets, looks challenging too. Other Fed officials who share that objective have acknowledged it is likely to be a delicate, slow-moving project.
Trump will host a swearing-in ceremony for Warsh at the White House on Friday, a White House official said Monday.
Here's what Warsh inherits as he steps into the role:
Divisions
Leading the Fed means forging consensus among the 11 other policymakers who also vote on interest rates. If Warsh pushes for rate cuts now, he is likely to face opposition from many of his new colleagues. Complicating matters is that one of his new colleagues is the departing chair, Jerome Powell.
For most of Powell's tenure, consensus was the norm. Over the past year, though, the voting committee was more divided. At the most recent meeting, in late April, the Fed held rates steady, but four officials dissented -- three because they thought the Fed should start signaling that rate increases are now as likely as rate cuts.
Four times a year, Fed officials are asked to project the future path of rates. In March, their median projection was for just one cut this year and a final cut next year.
They will update their forecasts at next month's meeting.
Inflation
When Warsh won Trump's nomination in January, most of his future colleagues saw further rate cuts as a matter of when, not if. The Fed had raised rates rapidly to curb inflation after the pandemic, and most officials expected to cut rates a couple more times before declaring mission accomplished. So Warsh's calls for lower rates weren't dramatically out of step with other policymakers.
That backdrop has shifted quickly. The Iran war, started at the end of February, has sent energy prices shooting higher and pushed up overall inflation as well. That makes it much harder for any central bank to cut. The European Central Bank and the Bank of England have both warned they may raise rates this year.
In his Senate confirmation hearing, Warsh suggested that he may encourage the Fed to look at alternate inflation metrics that have shown more moderate readings recently.
The job market
Meanwhile, evidence is mounting that the labor market has stabilized, and unemployment remains low, removing another rationale for rate cuts.
A dismal February report fueled anxiety that joblessness was set to rise. But since then, March and April numbers pointed to a labor market that hasn't lost all momentum. Policymakers who might have been tempted to cut rates after the ugly February number to cushion the labor market now have less immediate cause for concern.
Warsh has previously advocated for rate cuts based on productivity gains from artificial intelligence. The general idea behind that line of thinking goes like this: AI will make companies and workers more productive, allowing companies to not raise prices. That, in turn, will make room for rate cuts.
Market expectations
The Fed steers the economy not only by setting interest rates, but also by shaping expectations about how it will set rates in the future. So Fed officials pay attention to Wall Street bets on how rates will move in the months and years ahead.
At the start of the year, traders in futures markets were betting that the Fed would cut rates twice in 2026. But when the Iran war started, those expectations all but disappeared.
Now, the futures markets show that on average, traders expect no rate cuts in 2026.
The balance sheet
Warsh has long criticized the Fed for a balance sheet that he views as far too big.
The balance sheet ballooned when the Fed propped up the economy during the 2008-09 financial crisis, and again during the pandemic. The Fed's assets -- mostly government-backed bonds -- peaked at nearly $9 trillion in 2022. Holdings now stand at about $6.7 trillion.
The Fed's assets are matched by liabilities, and the Fed's liabilities are critical for the economy's smooth functioning. The Fed can't shrink its balance sheet without shedding liabilities too.
Of the Fed's major liabilities, two mostly are beyond its control: the deposits that the Treasury Department keeps in its checking account at the Fed, and physical cash. Another liability, a short-term borrowing program called the overnight reverse repo facility that amounted to more than $2 trillion in recent years, already shriveled nearly to zero during a previous balance-sheet drawdown.
That leaves bank reserves -- a form of currency that banks trade among themselves. The Fed has full control over the supply of bank reserves, and most proposals for shrinking the balance sheet involve finding ways to pare down this slice of liabilities.
Last fall, even a gradual decline in bank reserves sparked such acute anxiety in the bond market that the Fed quickly reversed course and began growing reserves again.
Write to Matt Grossman at matt.grossman@wsj.com and Peter Santilli at peter.santilli@wsj.com
(END) Dow Jones Newswires
May 18, 2026 13:34 ET (17:34 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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