Kevin Warsh takes on Fed in the face of inflation and war; meet the new chair

Kevin Warsh, whose broad criticism of current Federal Reserve officials, defense of interest rate cuts and ties to US President Donald Trump, put him ahead of other candidates to head the US central bank. He takes office as chair of the US Central Bank this Friday (22) at a crucial moment for monetary policy and the North American economy.

A growing boom in artificial intelligence technology is reshaping the economy in ways that Fed officials say could be profound for workers, businesses and consumers, but that will be difficult for Warsh and peers to assess in real time.

At the same time, inflation is already high and could potentially rise as the economy deals with shocks, including oil surpassing $100 per barrel due to the US and Israel war against Iran, high tariffs on imports and utilities, and some other costs rising due to the rollout of AI.

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Warsh, 56, won Trump's support for the job over what became a year-long public hearing among the leading candidates - including one who will sit alongside him on the Fed's board of directors.

Warsh has set ambitious reform goals for a central bank that he argues began to lose its way when he stepped down as director in 2011, in opposition to the Fed's bond buying. Now, however, the first few months may be consumed by a more pressing dilemma: raise interest rates to keep inflation from overshooting the Fed's 2% target or jeopardize his credibility as an inflation fighter, a quality on which he will be judged from the start.

"Inflation is the Fed's choice," Warsh declared at a Senate confirmation hearing. Control over short-term interest rates is a lever that can be used to encourage or discourage spending and thereby try to keep inflation at the 2% target set by the Fed. The Fed has not met the target for more than five years and is currently more than a percentage point above it.

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From the moment he takes the oath of office as the 11th Fed chairman, Warsh will be watching a global bond market that has begun to raise interest rates in a sign of growing concern about inflation, peers who are already shaping expectations that higher rates may be necessary, and Trump, who has seen interest rate hikes as a political attack on his economic program and has criticized outgoing Fed chairman Jerome Powell for failing to reduce borrowing costs.

Warsh's comments and approach to the ongoing disputes surrounding the Fed, including the Supreme Court ruling on Trump's so-far unsuccessful effort to fire Director Lisa Cook, will also be closely watched and compared with Powell's staunch defense of the Fed's independence.

Trump calls Jerome Powell 'too late' for not cutting interest rates even as tariffs and energy costs kept inflation above the Fed's target this year.

The Fed's next meeting will be on June 16th and 17th, when monetary policymakers will vote on interest rates and also present new economic projections.

One of Warsh's first substantive decisions will be to present a "point" where he believes interest rates will be at the end of this year and, in doing so, reveal whether views are not so different from those of peers he has criticized for "herd thinking" or become an outlier with views that could further confuse markets that are already raising US long-term interest rates.

The Fed's monetary policy decisions influence a range of consumer-driven and politically sensitive interest rates, such as those on home mortgages, while the inflation "choice" is now being made in the context of a shock that includes $4.50 per gallon gasoline, and which are beyond immediate reach.

Source: CNN