By Nick Timiraos
President Trump chose Kevin Warsh to run the Federal Reserve to secure the lower interest rates he has demanded for the past year. A suddenly pressing question is whether Warsh would have political cover to do the opposite and raise them.
Warsh was sworn in as the nation's top central banker at the White House on Friday, the first Fed chair to take the oath there since Alan Greenspan in 1987. It also marked his first public appearance with Trump since the president chose him in January after a monthslong public contest.
During the swearing-in ceremony, the president laid out the view he hopes the new chair will carry into office: that a booming economy needn't be reined in, and that strong growth doesn't cause inflation. "We want to stop inflation," Trump said, "but we don't want to stop greatness."
Warsh takes over at a moment fraught with risk. Inflation is rising, long-term bond yields are climbing, and a growing number of investors say the Fed's next move could be a rate increase -- not the cut Trump wanted and Warsh was hired to deliver.
The war in Iran, launched a month after Trump chose Warsh for the job as Fed chair, has scrambled the agenda: The conditions that would support cuts, such as falling inflation or a cooling labor market, have moved out of reach. Compounding the problem, the artificial-intelligence boom is looking like an engine of demand and growth, adding to near-term price pressures rather than easing them.
In recent weeks, the administration has settled on a way to manage the gap between what Trump wants and what the market will allow. Its argument, advanced this month by Trump's two most senior economic officials, is that the inflation now keeping rates high is a passing supply shock the Fed can look through -- so the cuts Trump wants are still coming, just later.
"Nothing is more transient than a supply shock," Treasury Secretary Scott Bessent said on CNBC last week, predicting a substantial easing in price pressures after "one or two more hot inflation numbers."
Kevin Hassett, director of the White House National Economic Council, made the same case days earlier on Bloomberg Television. "We're really likely to see rate cuts this year because of Kevin Warsh," he said.
The markets that set the government's borrowing costs increasingly see it differently. Investors are giving up on Fed rate cuts and pushing up bond yields. That in turn makes borrowing more expensive.
Some economists now argue the Fed will have to seriously consider raising rates, not just keeping them where they are. If the Fed holds steady but inflation keeps rising, that means the Fed has effectively adopted looser monetary policy just by standing pat.
Warsh has said he would decide policy and interest rates on the merits. He has said he hadn't made any agreement with Trump to lower rates.
Trump offered an ambiguous answer earlier this week when asked whether he would tolerate borrowing costs being raised rather than lowered in a Warsh-led Fed. "I'm going to let him do what he wants to do," the president said in an interview with the Washington Examiner on Tuesday.
Trump's comment widened the range of plausible outcomes anticipated by investors from the Warsh Fed, said James Egelhof, chief U.S. economist at BNP Paribas. "There was earlier a perception among many of my clients that the White House would strongly oppose rate hikes, and that the Fed would therefore be dissuaded from doing them," he said. The president's comment "supported the repricing of bond markets towards hikes."
Other strategists aren't convinced the political constraint is gone. "If Warsh's independence were unquestioned, we would likely be forecasting hikes in late 2026 and into 2027," said Steve Englander of Standard Chartered in a note to clients this week. Instead, he expects rates to stay on hold through 2027.
A White House spokesman said, "Americans can rest assured that Kevin Warsh, with his private sector success and prior experience on the Fed Board of Governors during the 2008 financial crisis, will be able to restore confidence and competence in Fed decision-making."
Trump spent much of last year attacking outgoing Chair Jerome Powell for refusing to cut or, when the Fed did cut, for not making deeper reductions. There is unease in Washington and on Wall Street that if Warsh or his colleagues conclude higher rates are warranted, the president who picked Warsh will turn on him the same way.
Warsh's allies say he can avoid that fate for now. In the run-up to his confirmation hearing last month, Trump took to calling Warsh to ask about the economy, according to three people familiar with the conversations. That relationship, his allies have suggested, could give Warsh an advantage Powell never had: the ability to influence Trump directly, which Powell didn't see as part of his job.
Just as important, several analysts say, is Bessent, whose backing Warsh would likely need in order to bring the president along on any move Trump might not otherwise want. "The critical inside move will be getting Bessent on his side first," said Steven Blitz of TS Lombard.
Complicating matters is that the latest leg of inflation traces to Trump's decision to strike Iran, which closed the Strait of Hormuz and is keeping energy prices elevated. It is the second time the administration has urged the Fed to look past price pressures tied to its own policies, after earlier arguing the price effects of Trump's tariffs would prove a one-off.
The economic puzzle facing Warsh might run deeper. Some analysts argue the bond selloff reflects not just inflation fear but a shift to a higher-rate world -- driven by higher government deficits and an AI boom that, by lifting growth and productivity, could raise the level of interest rates the economy can sustain.
Warsh declined at his confirmation hearing to provide any guidance about how he would handle potential trade-offs.
Because of the Iran war, the Fed might need to raise rates by about 1 percentage point, reversing the three cuts officials made in the second half of 2025, said Joseph Lavorgna, chief economist at SMBC Americas, in a note to clients this week. "I don't think anybody credible can possibly say the Fed should be cutting rates," said Lavorgna, who served until earlier this year as a senior adviser to Bessent, in an interview.
Whether Warsh can slow the committee's drift toward entertaining tighter policy -- and whether he even wants to -- is far from clear, Lavorgna said. "The bulk of the policymakers are going to circle the wagons and do what the economic data tell them," he said.
If so, the bond market might do Warsh's work for him. The selloff in long-term Treasurys is itself an argument for restraint. Cutting rates, or even appearing soft on inflation, could push borrowing costs higher still.
"A dovish slip in this environment would risk unhinging the long end of the bond market even further," said Marc Sumerlin, an economic consultant who was among the candidates Bessent interviewed for the Fed chairmanship last year.
Egelhof, the BNP economist, said the early weeks and months of Warsh's chairmanship will be unusually consequential. Warsh spent most of his career warning that central banks must be tough on inflation. The conditions that have boxed in any rate-cutting agenda are the same ones that could let him prove that credibility.
"It is a test," said Egelhof. "But it is also a tremendous opportunity."
Write to Nick Timiraos at Nick.Timiraos@wsj.com
(END) Dow Jones Newswires
May 22, 2026 12:57 ET (16:57 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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