It’s Warsh

Kevin Warsh was confirmed as the new Federal Reserve Chairman this week, officially beginning his four-year term, replacing Jerome Powell. Though many in the press paint Warsh as a ‘yes’ man to Trump who is likely to lower interest rates, his historical voting record as a Fed governor has been more restrictive. Warsh may or may not lower interest rates. In fact, if the current economic data continues to hold, the Fed may need to raise rates rather than lower rates. Here is a summary of the economic picture that Warsh inherits.

Federal Reserve policy, primarily interest rate policy, has a huge impact on the economy and markets. The Federal Reserve is tasked with a dual mandate or stable prices, meaning low inflation, and maximum employment, which is self-explanatory. These goals can be conflicting since high employment can lead to wages rising too quickly, fueling inflation.  The Federal Reserve uses higher interest rates to slow the economy and keep inflation from accelerating too quickly and lower interest rates to fuel the economy and keep unemployment low. Since inflation began to recede in 2024 the Federal Reserve has lowered the Fed Funds rate 6 times beginning in September 2024 from a high of 5.5% to the current 3.75%.  Up until recently, the market generally assumed that the Federal Reserve would lower rates again in 2026, especially given Warsh’s appointment and Trump’s pressure to lower rates.

However, recent economic data is putting pressure on the assumption that Warsh will lower rates. Core Consumer price inflation (“CPI”) halted its downward slide and rose to 2.8% in April, remaining above the Fed’s 2% stated goal. April’s Producer’s Price Index (“PPI”), a measure of the cost of business inputs, rose to a much hotter than expected 5.2%. Both of these data points point to higher inflation than the Fed wants. Worse, it’s heading in the wrong direction.

Meanwhile, the labor market and broader economy remain strong. ADP’s NET Pulse, a weekly survey of employment, showed that employers were adding more than 30,000 jobs per week during April, well above the average for the past year. The Federal Reserve’s GDPNow estimate for the second quarter of 2026 is now sitting at 4%, reflecting exceptionally strong economic growth.

With inflation rising and the labor market strong, it is hard to argue for lowering interest rates. In fact, the Federal Reserve may at least need to signal the willingness to raise rates. The market is already beginning to show the strain of higher inflation, with treasury interest rates spiking on Friday. Warsh may surprise many by holding interest rates steady for the time being. If this data holds, he may surprise more people with an interest rate increase as his first move as Fed chairman.