New Fed chief: What will change with Kevin Warsh at the helm?

Kevin Warsh takes over as Chairman of the US Federal Reserve. He replaces Jerome Powell , who can look back on an eventful tenure at the helm of the Federal Reserve (Fed).

This time, the handover is more delicate than usual. This is because US President Donald Trump, who nominated Warsh, has been exerting strong pressure for lower key interest rates for some time. The US Senate’s vote in favor of Warsh was also close, with 54 votes to 45 confirming him as the future head of the world’s most important central bank. What events shaped Powell’s eight-year term of office and in which direction could US monetary policy develop under Warsh’s leadership?

Powell’s turbulent time at the helm of the Fed

Powell led the central bank back to normality after the zero interest rate phase of the financial crisis, supported the economy with drastic interest rate cuts at the start of the pandemic and responded to the high inflation resulting from the lockdowns and the war in Ukraine with a cycle of interest rate hikes.

However, the central banker is likely to be remembered above all as a fierce opponent of US President Donald Trump. Trump has repeatedly criticized the Fed’s monetary policy under Powell. He has spoken out in favor of a key interest rate of one percent or less. During both of Trump’s terms in office, Powell defied the president’s attempts at intervention and insisted on the central bank’s independence.

Trump himself had appointed Powell to head the Fed. He succeeded Janet Yellen, who was also criticized by Turmp. In 2018, Powell initially continued his predecessor’s course of moderate interest rate hikes and was harshly criticized by Trump even then: “I think the Fed has gone crazy,” said Trump at an election campaign event.

After the pandemic years and the massive rise in inflation, a fall in inflation made it possible to cut interest rates again in 2024. However, Powell took a cautious approach and did not cut interest rates as quickly as Donald Trump, who has since been re-elected president after Joe Biden’s interregnum, would have liked. Trump publicly criticized Powell several times in harsh terms and expressed his desire for faster interest rate cuts.

In return, Powell insisted on the independence of the central bank. In 2025, Trump’s criticism of Powell escalated and grew into threats of dismissal. Trump’s attempts to intervene in connection with the upcoming change at the head of the US Federal Reserve fueled speculation that the Fed could no longer only pursue the goals of low inflation and full employment in future. What government wouldn’t want low interest rates on government debt and low lending rates for private households and companies?

US Federal Reserve already on the “dovish” side

As mentioned, the main task of monetary policy is to pursue two objectives: Full employment and price stability – i.e. low inflation. This already reveals an important area of friction. This involves the old question of whether a central bank should act in a more inflation-fighting (hawkish) manner and thus in favor of creditors or bond investors, or in a more business-friendly manner and thus in favor of debtors or equity investors (dovish).

A look at the key indicators of inflation, the unemployment rate and economic growth suggests that the Fed is now acting rather dovishly. At 3.8%, inflation is well above the target value, while inflation-adjusted growth of 3.3% is clearly above the potential value. The Fed’s forward guidance, i.e. the outlook for interest rate policy communicated by the central bank, also fits into this picture.

Status as at May 2026

Two forces are currently shaping the economy and the financial markets. On the one hand, the Iran conflict is pushing up energy prices. Part of this will be passed on to other inflation components. On the other hand, the AI boom is primarily an investment boom that is boosting inflation. Only in the medium to long term could the use of AI increase productivity and thus reduce inflation (higher labor productivity, more efficient processes, lower production costs, higher potential growth rate).

Numerous central banks, including the European Central Bank, have reacted to the inflationary developments by signaling interest rate cuts. In contrast, the Fed is still officially inclined to cut interest rates. However, this stance is shared by fewer and fewer Fed members, which is why the market is already pricing in a tenth of a percentage point higher key interest rate by the end of the year.

What will change under Kevin Warsh?

In this context, it is interesting that the new Fed Chairman Kevin Warsh is in favor of changing the Fed’s communication strategy. The Fed could withdraw its forward guidance, i.e. its outlook on interest rate policy. This would increase the central bank’s flexibility, but at the same time increase market volatility. Interest rate expectations would then depend more on new data (inflation, employment) and less on a previously communicated path.

Warsh recently argued in favor of lower interest rates, pointing to AI-induced productivity gains, among other things. This may have opened up a contradiction: should greater emphasis be placed on data dependency in the future or should forecasts be taken into account?

In fact, there is even more at stake. The US national debt is high and, according to OECD data, recently stood at 125% of GDP – as were the interest payments on the national debt, which amounted to 4.1% of GDP. It is not only in the USA that there is a risk that the central bank will no longer be able to focus its monetary policy primarily on price stability, as higher interest rates could jeopardize the sustainability of public finances. In technical terms, this is known as fiscal dominance over monetary policy. Normally, a central bank should raise interest rates or keep them high if inflation is too high. This becomes more difficult in the case of fiscal dominance because higher interest rates increase the interest burden on the state, increase the budget deficit and can therefore raise doubts about debt sustainability.

So what will change under Kevin Warsh? De jure, the Fed Chairman is not the sole decision-maker on monetary policy: he only has one vote on the Federal Open Market Committee (FOMC) and requires majorities for interest rate and balance sheet decisions. De facto, however, his role is considerably greater. He sets the agenda, organizes the FOMC consensus, shapes communication, influences the perceived reaction function and can change the Fed’s institutional direction. In Warsh’s case, the relevance therefore lies less in the question of whether he alone can push through interest rate cuts, but whether he will shift the Fed regime via communication, balance sheet policy, regulatory priorities and the relationship with the Treasury.

 

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