Trump is giving Warsh room to reshape the Fed

When Kevin Warsh steps to the podium Wednesday for his first press conference as chair of the Federal Reserve, he will enjoy something his predecessor Jerome Powell lacked for years: breathing room from the president.

“The president trusts Warsh, so he’ll have some scope of action,” a person familiar with Trump-Fed dynamics said, speaking under condition of anonymity to describe what has been one of the most volatile relationships of this administration.

The new Fed chair will attempt to use that freedom to make his case internally for far-reaching change at the Fed, people who know him and closely follow the Fed said. Warsh’s reform agenda includes moving the Fed slowly toward the lower rates Warsh has endorsed as well as reducing the Fed’s multi-billion-dollar balance sheet and changing how it thinks about inflation. Making that happen will require carefully marshaling the extensive but not unlimited political capital that comes with his new position.

Warsh comes in as the U.S. economy appears resilient, and a tentative deal to end the Iran war may ease inflation worries. While Warsh is unlikely to deliver the immediate interest-rate cut President Donald Trump has demanded, the new chair is already getting a break from a president who took unprecedented steps to undermine the Fed under Powell.

Powell said repeatedly that he and the Federal Open Market Committee based their interest-rate decisions solely on economic factors, but Trump was convinced otherwise. He saw politics everywhere.

The markets overwhelmingly anticipate Warsh will this week announce that the Fed is holding interest rates steady, just as Powell has done since December. Trump won’t see that as a betrayal, the person said. “I think having the trust of the president is worth a lot of room because the president thinks you’re acting out of your best judgment and not a vendetta against him,” the person said.

Trump has said in recent days he wants Warsh to “do whatever he wants” and “be totally independent.” The Fed is independent by statute and reports to Congress, not the president.

Warsh said at his April confirmation hearing he’s willing to hear from the president or anyone else on interest rates, but that the final call is up to the Fed. “Humble central bankers should be listening and then making their own decisions,” Warsh said.

The White House didn’t respond to a request for comment about the Trump-Warsh relationship. The Fed declined to comment on Warsh’s plans for the meeting and his relationship with the president.

How long that relationship holds up is a matter of intense speculation in Washington. Trump has a long history of turning on his political allies.

Warsh will need to quickly shore up his support among the 12 voters on the Federal Open Market Committee, composed of the president of the New York Fed, a rotating set of four other regional Fed bank presidents and the seven permanent members of the Fed’s Board of Governors.

“The chair has considerable leeway,” said Jon Faust, a Johns Hopkins University economist who was a longtime advisor to Powell. “But a chair who chooses to push too far in any one direction is going to both run into trouble with the board or the committee, whichever is relevant.”

The Fed’s most vocal proponent for cuts, Stephen Miran, resigned his board seat to make way for Warsh. Another governor who had favored cuts, Christopher Waller, said in May that rate hikes may be required instead if inflation doesn’t subside.

The Fed is officially committed to keeping a certain measure of inflation known as core personal consumption expenditures below 2%. Core PCE came at 3.3% in the most recent reading. 

The Iran war has spiked energy prices, raising the cost of gasoline in the U.S., among other price hikes. That has prompted some Fed members, including Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack, to say rates might need to rise this year.

Should the Strait of Hormuz reopen to shipping traffic as envisioned in the U.S.-Iran framework announced Sunday, Warsh would have better footing to make his longstanding case that artificial intelligence is helping the economy grow without worsening inflation.

Neither the war nor Trump’s tariffs have knocked the U.S. economy fully off balance. Labor Department data for May showed 172,000 jobs were created, with unemployment holding steady at 4.3%.

Traders have pivoted from expecting cuts in January when Warsh was nominated to expecting at least one quarter-point rate increase this year, according to CME FedWatch.

Warsh has an opportunity to reset how the Fed deals with those market expectations.

The Fed’s main policy statement, updated at each FOMC meeting, currently contains what is known as an “easing bias,” a sentence stating the Fed is looking for additional opportunities to cut rates. Three Fed members dissented at Powell’s final meeting, in April, to say they wanted the bias removed.

“My strong hunch is that sentence will be changed, which will eliminate all three dissents,” said Mickey Levy, a visiting fellow at the Hoover Institution and a longtime former colleague of Warsh’s. 

He has criticized the Fed’s practice of recording and transcribing the FOMC’s full two-day meetings, which he believes tamps down disagreement. 

Former Minneapolis Fed President Gary Stern was on the FOMC in the 1990s when Chair Alan Greenspan revealed the Fed had been recording the meetings. “It affected the nature of the discussion and the conversation, and not for the better,” Stern told CNBC.

But Warsh would need to spend political capital to immediately change how the meetings operate, and he may rather reserve that for other priorities.

“That’s the kind of calculation that he’ll be making in every direction,” Faust said.

Senior staff Powell shaped remain in place. Warsh hired two Fed outsiders as interim policy advisors, but hasn’t made other major personnel changes.

Warsh also inherits from Powell an informal decision-making arrangement known as the troika, an informal grouping of the Fed chair, the vice chair and the New York Fed president. Philip Jefferson has been vice chair since 2023, while John Williams has led the New York Fed since 2018.

“The troika is a main sounding board about where policy should be going,” Faust said. Warsh could informally elevate another group of advisors, but because the vice chair and New York Fed president have inherent authority, they are a useful place to start building consensus, he said.

CNBC has learned of a quiet lobbying effort for Warsh to encourage Williams to retire early and to line up replacements two years ahead of time. There is no sign Warsh is engaged in the effort. Williams will hit mandatory retirement age of 65 for Fed bank presidents in June 2028.

The Fed’s Washington-based board is heavily involved in selecting regional Fed presidents, including in New York, and must vote to approve the final choice.

Making changes to the troika is an area where Warsh will need maximum political capital, Faust said.

The New York Fed declined to comment.

One other obstacle in Warsh’s way will be the markets, said Mark Spindel, founder and chief investment officer of Potomac River Capital and a Fed historian. “Who’s the eighth governor in the room? The bond market.”

Warsh has said he wants to change the way the Fed measures inflation, saying he isn’t impressed by core PCE. But he has been less explicit about what exactly he’d like to replace it with. That may be by design. An overreach in making fast changes in something as crucial as the Fed’s main inflation measure could prompt could revolt from voters and staff.

The unclear path forward has consequences for the market, Spindel said.

“As bond traders and fixed income investors, we’re just going to want a little bit more yield to account for the fact that we don’t know what this guy’s doing,” he said.

Some but not all of of those answers will come Wednesday. That may be enough for Warsh.

Warsh will be able to “buy himself time” at Wednesday’s meeting by taking potential points of agreement — such on holding interest rates and removing the Fed’s easing bias — and presenting them as the fruit of his leadership style and the FOMC’s careful deliberation, Spindel said. That will allow Warsh to move forward on more challenging issues such as the inflation measures “without upsetting credibility, and certainly pleasing the guy in the Oval Office,” Spindel said.