By Nick Timiraos
Kevin Warsh has been on the public scene for two decades, with a long list of speeches, podcasts, op-eds and interviews about what he thinks the Federal Reserve is for and where it has gone wrong. So why are there so many questions in markets and in Washington about what he will do now that he is about to be the Fed chair?
Two reasons stand out. First, the world Warsh inherits has changed suddenly. Inflation never returned to the Fed's 2% target after peaking four years ago and is now rising again because of the Iran war and tariffs. The bond market and the Fed have shifted over the past six months from entertaining rate cuts to debating rate increases.
A year ago, Warsh could argue both that the Fed needed to restore what he saw as lost credibility and that the conditions for rate cuts were close at hand. The energy shock from the war has pulled those two halves of his framework apart.
Second, Warsh built his case for the chairmanship last year before a narrow audience in President Trump, who had grown determined not to repeat his first-term disappointment of naming a Fed chair who wouldn't go along with him. Warsh must now satisfy another audience: the 18 colleagues around the table at the Federal Open Market Committee, who bring their own views and scar tissue. Warsh didn't pick them and can't replace them.
Warsh's viewpoint has been consistent. He says that the path to restoring Fed credibility -- and ultimately getting the lower rates Trump wants -- runs through new and better methods for measuring and forecasting inflation, a smaller Fed footprint in markets and a quieter central bank.
"He has had this view that the role of the central bank should be in the background, and that will keep it out of the political space where it's subject to all these kinds of criticisms," said Nellie Liang, a former Fed economist who worked with Warsh during his first stint as a governor. His vision of the Fed, she said, focuses on a longer-term arc rather than meeting-by-meeting decisions.
Warsh's agenda
The questions now: Which parts of his ambitious agenda can be turned into policy that his colleagues will support, and on what timeline. Warsh is to be sworn in as Fed chair at the White House on Friday.
Interest rates: Warsh has argued that the Fed misreads inflation by relying on models that treat strong growth as inflationary and on data that lags behind by months. He rejects the Phillips curve paradigm -- in which higher employment generates higher inflation through wage pressure -- that has guided central banks for decades. Inflation, he says, comes from excessive government spending, not income growth.
He has been equally impatient with how the Fed measures inflation, calling its preferred gauge a rough approximation the institution treats with false precision. He has proposed a project to build a real-time inflation measure from millions of prices as they move through the economy.
The strategy rests on a paradox Warsh likes to underline. If the public believes the Fed will keep inflation low and stable, energy shocks and tariffs become one-off price changes rather than embedded inflation.
In Warsh's telling, the more the Fed is trusted to keep inflation low, the less it has to act to do so. "Eisenhower knew as a warrior, we can avoid wars if we're prepared for one. Same thing is true with inflation, " he said at a State Street conference last summer, according to remarks viewed by The Wall Street Journal.
Balance sheet: The Fed's $6.7 trillion asset portfolio is roughly four times as large a share of the economy as it was when Warsh joined the Fed in 2006. The Fed grew it during emergencies and never fully brought it back down, partly because of new banking regulations and the growth of the Treasury's account at the Fed. That, Warsh has argued, has crowded the Fed into markets where it doesn't belong and unwittingly subsidized federal borrowing.
He has called for a new Treasury-Fed Accord, modeled on the 1951 agreement that separated monetary policy from Treasury financing, for an era in which those lines have blurred. But he has also counseled a deliberate approach. "It took us 18 years to create this big balance sheet," he said at his confirmation hearing last month. "We won't be able to fix it in 18 minutes."
Communications: Former Fed leader Ben Bernanke famously quipped that monetary policy is 98% communication and 2% action. Warsh wants a reset.
The Fed's policymakers, in his view, speak too much about the near-term rate path -- and have a poor record of forecasting it. "If you're not very good at something, you should do less of it," he said last summer.
A less visible Fed would require buy-in from colleagues. Outgoing Chair Jerome Powell last year shelved an attempt to revisit officials' "dot plot" exercise, where they pencil in where they expect rates to go. Changing the tools, Powell said, required agreeing on putting something better in its place -- and the committee couldn't.
Securing buy-in
The communications challenge illustrates the broader tension looming over Warsh's chairmanship. His colleagues take the framework seriously, even when they disagree with significant parts of it.
The views range from polite curiosity to direct opposition. Boston Fed President Susan Collins, in an interview last week, lightly defended both the dot plot and the Fed's current balance-sheet operations. "There's a long history of new chairs coming and having views, and I think that is appropriate," she said.
In a speech last week, Fed governor Michael Barr called shrinking the balance sheet "the wrong objective" and laid out how he believed several of Warsh's preferred mechanisms would undermine the banking sector and raise financial stability risks.
On rates, the two chief arguments Warsh advanced last year -- that AI-driven productivity gains would soon deliver lower inflation, and that a smaller balance sheet would create room to ease -- already faced skepticism from the committee even before the energy shock.
"Warsh is in a tough spot because he's not going to be able to deliver what the president wanted," said Patrick Harker, the former Philadelphia Fed president who retired last June. "There's no way they're going to be cutting rates, I would say, this whole year. How could you?"
Warsh has said he would decide policy on the merits. People who have worked with him say he is unlikely to spend his chairmanship trying to force outcomes the committee won't support and will instead look to build consensus on issues the Powell Fed never resolved.
Warsh has been clear that he sees his agenda on a longer horizon than any one meeting or any one shock. "The Fed doesn't need a revolution," he said in a Hoover Institution podcast last year. "What it needs is some degree of restoration."
Write to Nick Timiraos at Nick.Timiraos@wsj.com
(END) Dow Jones Newswires
May 21, 2026 09:00 ET (13:00 GMT)
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