As Jerome Powell’s term as chair of the US Federal Reserve (the Fed) draws to a close on May 15, his successor, Kevin Warsh, should brace himself for a challenging tenure.
In his eight-year term at the helm of the Fed, Powell faced several challenges. He led the US central bank through market dysfunction at the onset of the COVID-19 pandemic, projecting calm, confident leadership that helped stabilize markets. And in the wake of the crisis, Powell successfully steered US monetary policy through the shoals of inflation and unemployment, bringing inflation down from the post-pandemic highs driven by supply-chain disruptions, without the severe recession that many economists thought was inevitable. But arguably, Powell’s biggest challenge was one unrelated to the nuances of monetary policy: US President Donald Trump’s unprecedented assault on the Fed’s independence.
Since his return to office in January 2025, Trump has consistently berated, threatened and bullied Powell to bend US monetary policy to his will. Trump’s goal is to get the Fed to lower interest rates to stimulate the economy. And when public pressure failed to get results, he weaponized the Department of Justice, charging Powell with alleged improprieties regarding renovations to Fed buildings in Washington, DC. (For the record, the courts found these charges wholly without merit.)
Rather than succumb to the intimidation, however, Powell continued to do what he has done throughout his tenure at the helm of the Fed: calmly chart a course for US monetary policy that advances the long-term interests of the economy, consistent with the Fed’s dual objectives of maintaining low inflation and promoting high employment. That course has brought interest down as inflation eased, just not fast enough for Trump, who likely sees rapid growth — running the economy “hot” — as the surest way to boost the prospects of Republicans in the November midterm elections.
The problem for Trump is that inflation has remained stubbornly above the Fed’s desired level, particularly indicators of core inflation, which exclude volatile food and energy prices, of most concern to the Fed. Moreover, his own policies have made it more difficult for the Fed to ease monetary policy. Tariffs imposed by the administration last year, for example, on US prices for imports from certain countries. In addition, deportations and aggressive enforcement of immigration laws have likely introduced supply-chain disruptions that raise costs in key sectors, especially agriculture and construction. Meanwhile, Trump’s war of choice waged on Iran has already led to steep increases in fuel costs and can be expected to reverberate through the economy in the form of higher transportation costs and shortages of key inputs, including fertilizer, which will push the prices of foodstuffs higher still.
These self-inflicted shocks increase the uncertainty surrounding the economic outlook. Most immediately, the risk of a global recession has increased, along with the threat of higher inflation driven by supply-side shocks. That stagflation mix calls for a careful assessment and judicious balancing of considerations. Such assessment and balancing require independence from short-term political calculations.
Warsh Under Pressure
Accordingly, with the end of Powell’s term as Fed chair, the question is whether Warsh will succumb to the pressure that is sure to come from the White House. Incredibly, the congressional hearings on his nomination did not include a single question on how he would respond to intimidation. In this respect, while Warsh has impressive credentials, including a previous stint with the Fed, his views on monetary policy have exhibited a certain degree of partisan flexibility. An inflation “hawk,” eager to raise rates to prevent inflation when the Democratic Party is in control of the White House and Congress, he has been a “dove,” more inclined to advocate for lower interest rates, when Republicans are in charge.
Nevertheless, whatever his personal beliefs, one thing is certain: Warsh would not have been nominated to replace Powell if Trump didn’t believe he would cut interest rates. It is reasonable to assume, therefore, that Warsh will be subject to considerable pressure to cut rates, whether those cuts are warranted by underlying economic conditions or not.
Compounding Warsh’s challenge is the fact that his ability to dictate Fed policy is limited. Even if he is prepared to placate Trump by injudiciously reducing interest rates in the face of, say, rising inflation, he would have to convince his colleagues on the Fed’s policy-setting board to agree to lower rates. That could be a heavy lift. Most Fed members are highly accomplished individuals who jealously guard their professional reputations and personal integrity, as well as the independence of the Fed. They are unlikely to be swayed by arguments rooted in political pragmatism.
All this is hugely consequential for the simple reason that the Fed’s effectiveness in achieving its low inflation-full employment goals depends critically on its credibility. If the Fed is perceived to be subject to political interference, such that monetary policy is thought to be set according to the political whims of the White House, its ability to anchor inflation expectations could be impaired. This would mean that the costs of bringing inflation down after an inflationary shock, measured in terms of the higher unemployment needed to reduce wage and price pressures, would be raised. And that would put the “soft-landing” managed by Powell following the pandemic out of reach.
For a historical example of this effect, look no further than the early 1970s, when President Richard Nixon harangued Fed Chair Arthur Burns to cut interest rates in the face of oil price shocks and slowing productivity. Burns obliged, unleashing a progressive increase in inflation, which saw the rate of inflation double and then double again over the decade. By the early 1980s, inflation was so high and the Fed’s credibility so eroded that it took a severe recession, triggered by the high-interest rate policy of a new Fed chair, the legendary Paul Volker, to bring inflation down and restore credibility.
Today, the attacks on the Fed’s independence coming from the White House, much like those 50 years ago, have made Warsh’s job more difficult even before he assumes the responsibilities of Fed chair.
So, what does Warsh do? He potentially faces an unpalatable choice. He could push for interest rate cuts that may not be justified by the underlying economic conjuncture, knowing that he would be subject to the same treatment accorded to Powell if he is unable to win the support of his Fed colleagues. Alternatively, Warsh could search for some way to reduce the pressure coming from the White House.
Specifically, given the Fed’s role in regulating large banks, Warsh could appease Trump by agreeing to ease post-global financial crisis regulations that require banks to hold higher capital and liquidity buffers. This would facilitate the credit expansion that could run the economy “hot,” as Trump wants, while protecting the Fed’s independence with respect to monetary policy. Though proposals to dial back crisis-era regulations are already under consideration, consistent with the deregulation ethos of the Trump administration, Warsh could offer to further relax prudential regulations to buy peace with the White House. Such a deal, if proffered, would be short-sighted, however, in that it merely trades off one risk —inappropriate monetary policy — for a potentially even greater risk: financial instability.
In this respect, regardless of whatever commitments he gave to secure his nomination, the only way Warsh can faithfully serve the interests of the American people is to emulate the example of his predecessor, outgoing Fed Chair Powell, whose steady calm under the barrage of abuse from the Trump White House exemplifies the term “public service.”
