(Bloomberg) — Just three weeks into the job, Federal Reserve Chairman Kevin Warsh is already facing an unusually high-stakes test.<\/p>\n
Most Read from Bloomberg<\/p>\n
Inflation is roaring back at the fastest pace in three years. There\u2019s growing dissent among the central bank\u2019s policymakers. And investors have been dumping US Treasury bonds and piling into bets the Fed will need to start raising rates by December, defying President Donald Trump\u2019s call to lower them instead.<\/p>\n
There\u2019s little hanging on the outcome of the Fed\u2019s policy meeting itself this week. The bank is widely expected to hold its benchmark rate steady in a range of 3.5% to 3.75% while waiting to see how the Iran war\u2019s energy-price shock ripples through the economy, even given Sunday\u2019s interim agreement to halt the conflict.<\/p>\n
But Warsh\u2019s maiden press conference \u2014 and the Fed\u2019s post-meeting statement and forecasts \u2014 will be scoured for clues on what\u2019s next.<\/p>\n
If there\u2019s a convincing message that the Fed is willing to shift back into inflation-fighting mode, Wall Street will likely be reassured about Warsh\u2019s commitment to maintaining the bank\u2019s political independence. Fall short, and it will rattle markets already worried he could jeopardize the Fed\u2019s credibility by giving in to the White House.<\/p>\n
\u201cIt\u2019s just a very difficult position for him all the way around,\u201d said James Clouse, an economist at the Andersen Institute and former deputy director of the Fed\u2019s division of monetary affairs.<\/p>\n
It\u2019s never easy for a new Fed chief and some, like Alan Greenspan or Ben Bernanke, faced significant challenges not all that long after assuming the role.<\/p>\n
Yet in Warsh\u2019s case, the immediate conflict between the White House\u2019s priorities and the direction of the economy is particularly fraught. The tension on Wall Street has been increased by questions about Warsh\u2019s views and by a broader outlook complicated by war and an artificial-intelligence investment boom that\u2019s pouring fuel on what\u2019s been a surprisingly resilient economy.<\/p>\n
Warsh was a staunch hawk during his term as Fed governor between 2006 and 2011, when the housing-market collapse drove the US into a deep recession.<\/p>\n
But in the years since he morphed into a fierce critic of the central bank and last year faulted it for continuing to forecast elevated inflation, saying AI will unleash a \u201csignificant disinflationary force\u201d by increasing productivity. Warsh\u2019s silence since being sworn in last month \u2014 not atypical of a new chair trying to get his bearings \u2014 further complicates the picture.<\/p>\n
Story Continues <\/p>\n
\u201cHe\u2019s not spoken to monetary policy in a really long time at this point,\u201d said Ed Al-Hussainy, portfolio manager at Columbia Threadneedle in New York. \u201cSo we\u2019re all reading the chicken entrails on what\u2019s going on inside Warsh\u2019s mind on monetary policy.\u201d<\/p>\n
Moreover, developments in the economy have shifted rapidly since Trump\u2019s Iran war increased oil prices. As businesses see costs climb, they\u2019re passing that along to consumers in the form of higher prices, adding to inflation that had already been stuck over the Fed\u2019s 2% target for the past five years. In May, the consumer price index \u2014 one widely followed inflation gauge \u2014 climbed 4.2% from a year earlier, the most since April 2023.<\/p>\n
That has sharply reset expectations on Wall Street. Traders have ditched once widespread bets that the Fed would resume cutting rates this year to wager on the opposite. Yields on two-year Treasuries have jumped to over 4%, above the Fed\u2019s policy rate, while 30-year yields last month hit the highest since 2007. Both were seen as clear messages from Wall Street that rates need to head higher.<\/p>\n
That\u2019s not lost on Fed officials. At the latest meeting in April, many policymakers warned they\u2019d likely need to start raising rates if inflation remained elevated and wanted to drop the bias toward lowering them, according to the minutes from that meeting. Three dissented because they objected to the wording of the Fed\u2019s statement.<\/p>\n
And while investors dialed back expectations for hikes following news of a deal to halt the Iran war, traders were still pricing in about a 60% chance of a quarter-point raise by December.<\/p>\n
At the same time, Warsh is taking over in the wake of an unprecedented attack on the central bank by the Trump administration, including an effort to oust Governor Lisa Cook and a criminal investigation that Jerome Powell, Warsh\u2019s predecessor, said was in retaliation for not bending monetary policy to the president\u2019s will.<\/p>\n
When Trump elevated Warsh to the board he said he respected his independence. But Trump repeatedly lashed out at Powell and this month said Warsh would be wrong to raise rates, asserting that the Fed should lower them instead.<\/p>\n
\u201cI\u2019m hoping that the Kevin Warsh we see is the sort of card-carrying anti-inflation Kevin Warsh that was so present for many years, because inflation is too high,\u201d said Ellen Meade, an economics professor at Duke University who advised Fed officials during a decades-long career at the board. \u201cHe needs to do something that demonstrates he understands the message from the incoming data.\u201d<\/p>\n
Some see concerns that Warsh could squander the Fed\u2019s credibility to placate the president as overblown.<\/p>\n
\u201cThere\u2019s really no reason to expect him to just say \u2018we\u2019re lowering interest rates because the president wants lower interest rates\u2019,\u201d said Norbert Michel of the Cato Institute\u2019s Center for Monetary and Financial Alternatives. \u201cKevin knows that\u2019s not how things work.\u201d<\/p>\n
Still, Warsh has promised to mount a significant shakeup at the central bank that includes closer cooperation with the Treasury Department. He has said the Fed needs to change how it assesses inflation and communicates with the public, and he\u2019s advocated reducing the central bank\u2019s massive bond holdings \u2014 a step that has the potential to push up long-term rates by forcing markets to absorb more bonds.<\/p>\n
Yet the more immediate focus will be on the signals that Warsh chooses to send about where he intends to steer the central bank over the next several months.<\/p>\n
\u201cYour first meeting will forever be your first meeting,\u201d said Jason Granet, the chief investment officer at BNY in New York. \u201cThe statement, the minutes and the press conference \u2014 this meeting is going to have a lot to chew on.\u201d<\/p>\n
(Updates with extra context and market moves post US-Iran peace agreement.)<\/p>\n
Most Read from Bloomberg Businessweek<\/p>\n
\u00a92026 Bloomberg L.P.<\/p>\n","protected":false},"excerpt":{"rendered":"(Bloomberg) — Just three weeks into the job, Federal Reserve Chairman Kevin Warsh is already facing an unusually…\n","protected":false},"author":2,"featured_media":704856,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[27],"tags":[7904,28,45588,942,56700],"class_list":["post-704855","post","type-post","status-publish","format-standard","has-post-thumbnail","category-business","tag-bloomberg","tag-business","tag-kevin-warsh","tag-president-donald-trump","tag-the-fed"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/704855","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/comments?post=704855"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/704855\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media\/704856"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media?parent=704855"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/categories?post=704855"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/tags?post=704855"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}