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Warsh to succeed Powell at the Fed with inflation at three-year high

Warsh takes office with US inflation at a three-year high

The US Senate on Wednesday confirmed economist Kevin Warsh as the 17th chair of the Federal Reserve in a 54-45 vote, in a transition that hands control of the world's most influential central bank to President Donald Trump's pick at a moment of strong inflationary pressure. Warsh, a former Fed governor during the 2008 financial crisis and a former Morgan Stanley banker, will formally take office on Friday 15 May, following the departure of Jerome Powell, whose eight-year term has been marked by successive economic crises and a prolonged clash with the White House over the central bank's political independence.

The confirmation came on a vote almost entirely aligned with party lines, the most divided in history for a nominee to the Fed chairmanship. Democratic Senator John Fetterman, of Pennsylvania, was the only legislator from his party to cross over in favor of the Republican nominee. The process, stalled for weeks by the opposition of Republican Senator Thom Tillis, was unblocked after the Justice Department archived its investigation into Powell linked to the testimony the outgoing Fed chair gave before Congress on the cost overruns at the bank's headquarters renovation in Washington. Federal Prosecutor Jeanine Pirro nonetheless warned that she could reopen the inquiry if the Fed's inspector general finds evidence of misconduct.

Warsh takes office with US inflation at a three-year high. The latest Consumer Price Index jumped in April above wage growth, driven by the energy shock from the war by the United States and Israel against Iran and the closure of the Strait of Hormuz. Markets, according to a JPMorgan analysis, are pricing in that the central bank will hold its benchmark rate unchanged for the rest of the year and even contemplate hikes if inflation accelerates, a scenario that could pit the new chair against Trump, who has repeatedly demanded immediate cuts and reportedly joked, according to CNN, that he would sue Warsh if he does not lower rates.

The new head of the Fed has for years advocated reducing the central bank's balance sheet, currently at 6.7 trillion dollars, and has opposed the quantitative easing policies applied after the 2008 crisis and the pandemic. According to previews collected by analysts, he could cut the number of annual Federal Open Market Committee meetings from eight to four, hold fewer press conferences, and reduce the size of the Washington-based workforce.

Powell, in an unusual decision, will remain on the Board of Governors after leaving the chairmanship, at least until the internal investigation concludes “definitively and transparently.” Only Marriner Eccles, in 1948, made an equivalent choice. Warsh's first monetary policy meeting is scheduled for 16 and 17 June.