Trump trusts Fed Chair Warsh. It matters for more than interest rates
U.S. President Donald Trump (R) and the new chairman of the Federal Reserve, Kevin Warsh, during the swearing-in ceremony in the East Room of the White House on Friday, May 22, 2026 in Washington, DC, United States.
Take Drago | Bloomberg | Getty Images
When Kevin Warsh steps up to the podium Wednesday for his first news conference as Federal Reserve chairman, he’ll enjoy something his predecessor, Jerome Powell, hasn’t had in years: The opportunity to take a breather from the president.
“The President trusts Warsh, so he will have some leeway,” said a person familiar with Trump-Fed dynamics who spoke on condition of anonymity to describe one of this administration’s most volatile relationships.
The new Fed chairman will try to use that freedom to argue his case internally for sweeping change at the Fed, people who know him and follow the central bank closely have said. Warsh’s reform agenda includes gradually moving the Fed toward lower rates that Warsh has approved, as well as reducing the institution’s multibillion-dollar balance sheet and changing its thinking about inflation. Achieving this will require careful marshalling of the extensive but not unlimited political capital that comes with his new position.
Warsh steps in at a time when the U.S. economy appears resilient and an interim deal to end the Iran war could ease inflation concerns. While Warsh is unlikely to immediately deliver the rate cut that President Donald Trump is demanding, the new president is already taking a break from a president who has taken unprecedented steps to undermine the Fed under the Powell administration.
Powell has repeatedly said he and the Federal Open Market Committee base interest rate decisions solely on economic factors, but Trump is convinced otherwise. He saw politics everywhere.
Markets overwhelmingly expect Warsh to announce this week that the Fed is keeping interest rates steady, just as Powell has done since December. The person said Trump would not view this as a betrayal. “I think having the president’s trust is worth a lot of space because the president thinks you’re acting with your best judgment and not out of a vendetta against him,” the person said.
Trump has said in recent days that he wants Warsh to “do whatever he wants” and “be completely independent.” The Fed is independent by law and reports to Congress, not the president.
Warsh said at his confirmation hearing in April that he was willing to hear from the president or anyone else about interest rates, but the final call rested with the Fed. “Honest central bankers should listen and then make their own decisions,” Warsh said.
The White House did not respond to a request for comment on the Trump-Warsh relationship. The Fed declined to comment on Warsh’s plans for the meeting and his relationship with the president.
How long this relationship will last is a matter of intense speculation in Washington. Trump has a long history of turning on his political allies.
Warsh will need to quickly strengthen his support among the 12 voters on the Federal Open Market Committee, a rotating group that includes the president of the New York Fed, four other regional Fed bank presidents and seven permanent members of the central bank’s Board of Governors.
“The presidency has a lot of leeway,” said Jon Faust, a Johns Hopkins University economist who has been a longtime adviser to Powell. “But a president who chooses to go too far in any direction will run into trouble with both the board and the committee, whichever is important.”
Interest rate reduction is not expected
Fed’s biggest proponent of cuts Stephen Miran resigned his board seat to make room for Warsh. Another governor who is in favor of cuts is: Christopher WallerHe said in May that if inflation did not fall, interest rate hikes might be necessary instead.
The Fed is committed to keeping a particular measure of inflation, formally known as core personal consumption expenditures, below 2%. In the latest data, core PCE came in at 3.3%.
The Iran war increased the cost of gasoline in the United States by increasing energy prices, among other price increases. This galvanized some Fed members, including Dallas Fed President Lorie Logan and the Cleveland Fed President. Beth Hammockto say rates may have to rise this year.
If the Strait of Hormuz reopens to ship traffic, as envisaged in the US-Iran framework announced Sunday, Warsh will be able to better ground his long-standing claim that artificial intelligence helps the economy grow without worsening inflation.
Neither the war nor Trump’s tariffs have completely destabilized the US economy. Data from the Ministry of Labor for May showed that 172,000 new jobs were created, while unemployment remained stable at 4.3%.
Investors have shifted from expectations of a cut in January, when Warsh was nominated, to expecting an interest rate increase of at least a quarter point this year. CME FedWatch.
Warsh has an opportunity to reset how the Fed deals with these market expectations.
The Fed’s main policy statement, updated at each FOMC meeting, contains what is now known as “easing bias”; A sentence indicating that the Fed is looking for additional opportunities to cut interest rates. Three Fed members dissented from Powell’s last meeting in April, saying they wanted the bias removed.
“My strong hunch is that the sentence will be changed and that will eliminate all three naysayers,” said Mickey Levy, a visiting fellow at the Hoover Institution and a former longtime colleague of Warsh.
Warsh won’t shy away from opposition to the Fed
Warsh will bring a new relationship with Fed opponents. Powell worked with voters to build consensus ahead of the caucuses, and disagreements were rare, making the three-member dissent in April particularly notable.
“Kevin, that’s not going to happen,” Levy said. “He won’t pay attention to the opposition and he won’t be able to manage this.”
Warsh explains his preferred approach: a “family feud” or a bitter debate within the Fed. “I prefer clean notes and messier meetings,” Warsh said at his confirmation hearing in April.
He criticized the Fed’s practice save and copy Two full days of FOMC meetings believe this has quelled the disagreement.
Former Minneapolis Fed President Gary Stern was on the FOMC in the 1990s when Chairman Alan Greenspan announced that the Fed was recording meetings. “This affected the nature of the debate and the conversation, and it didn’t impact it in a positive way,” Stern told CNBC.
But Warsh will need to expend political capital to immediately change how the meetings operate, and he may choose to devote that to other priorities.
“This is the kind of calculation he will make in every direction,” Faust said.
Warsh steps into Fed shaped by Powell
Senior staff member Powell remains in good shape. Warsh was hired Two people from outside the Fed were appointed as interim policy advisers, but no other significant personnel changes were made.
Warsh also inherited from Powell an informal decision-making arrangement known as the troika, an informal grouping of the Fed chair, vice chair and the president of the New York Fed. Philip Jefferson has been vice president since 2023, while John Williams has been head of the New York Fed since 2018.
“The troika is the main sounding board for where policy should go,” Faust said. Warsh could informally enlist another group of advisers, but he said it’s a useful place to start building consensus because the vice president and the New York Fed president have inherent authority.
CNBC has learned that Warsh quietly lobbied Williams to encourage him to retire early and line up replacements two years in advance. There is no indication that Warsh was involved in this effort. Williams will reach 65, the mandatory retirement age for Fed bank presidents, in June 2028.
The Fed’s Washington-based board of governors is heavily involved in selecting regional Fed presidents, including New York, and must vote to confirm the final selection.
Making changes to the troika is an area where Warsh will need maximum political capital, Faust said.
The New York Fed declined to comment.
Another obstacle for Warsh will be the markets, said Mark Spindel, founder and chief investment officer of Potomac River Capital and Fed historian. “Who is the eighth governor in the room? The bond market.”
Warsh said he wants to change the way the Fed measures inflation, saying he is not affected by the core PCE. But he was less clear about what exactly he wanted to replace it with. This may be by design. Going overboard with making rapid changes to something as important as the Fed’s key inflation measure could lead to a revolt from voters and workers.
The uncertain path forward will have ramifications for the market, Spindel said.
“As bond traders and fixed income investors, we’re going to want a little bit more yield, taking into account the fact that we don’t know what this guy is doing,” he said.
Some, but not all, of these answers will come on Wednesday. This might be enough for Warsh.
Spindel said Warsh could “buy himself time” at Wednesday’s meeting by addressing potential points of agreement (such as keeping interest rates steady and eliminating the Fed’s easing bias) and presenting them as the fruit of his leadership style and the FOMC’s careful deliberation. Spindel said this would allow Warsh to move forward on tougher issues, such as inflation measures, “without undermining credibility and certainly without pleasing the man in the Oval Office.”
