Warsh faces bind between Trump, inflation after scorching new report

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Federal Reserve Chair Kevin Warsh is facing a major challenge ahead of his first monetary policy meeting leading the central bank on the heels of an alarming May inflation report.

The Federal Open Market Committee (FOMC) is almost certain to keep rates unchanged at the end of its two-day meeting Wednesday, even after the latest inflation data from the Labor Department showed prices rising at the fastest annual rate in more than three years.

But a growing number of economists and policymakers are saying rate hikes could be necessary this year.

Warsh now faces a difficult balancing act as he contends with rising inflationary pressures tied to the war in Iran, an increasingly hawkish Federal Reserve and expectations from President Trump, who has promised for months that his new Fed pick would deliver lower interest rates.

“Warsh is under a lot of pressure, and the conflict in Iran has significantly added to that with the inflation impact,” Stephen Myrow, a former Treasury official and managing partner of Beacon Policy Advisors, told The Hill.

Myrow said the latest inflation report “raises a concern” about the “stickiness, potentially, of the inflation,” adding to doubts that the Fed will be able to lower rates anytime soon.

“We’ve gone from an expectation at the beginning of the year that, by the end of the year, rates would be lower, and now… rate cuts seem to be foreclosed for the time being, and the debate is if and when we’re going to get rate increases,” Myrow said.

“And this just added fuel to the fire.”

The Consumer Price Index released Wednesday showed prices rising 4.2 percent in May from a year earlier, the third consecutive month with annual inflation showing an increase. In February, before the war in Iran started, consumer prices rose 2.4 percent from a year earlier. The last time inflation topped 4 percent was in April 2023. The latest data came shortly after a May jobs report pointed to continued strength in the labor market, another key factor in the Fed’s interest-rate decisions.

Loretta Mester, former president and CEO of the Federal Reserve Bank of Cleveland, told The Hill that the latest CPI report “is telling the committee that inflation isn’t moving in the right direction.”

“They’ve been hoping to get back to the narrative they had before — which was, once we get through these supply shocks, inflation’s going to be moving back down — but this report indicates that that’s even farther away as being the right interpretation of the economy,” Mester said.

“This piece of data is another factor that says inflation is too high, it’s not moving down, the risks are that inflation is going to remain higher than they’d like,” she added.

While there is broad consensus that the Fed will hold rates steady this week, several economists said the latest CPI data has weakened the case for rate cuts in the near future.

“The likelihood of a rate hike in the coming months has increased with this week’s consumer and wholesale inflation data, but the Fed will most likely wait another month before taking that step,” NerdWallet senior economist Elizabeth Renter said.

Michael Pearce, chief U.S. economist at Oxford Economics, expects Fed officials to adopt a more cautious tone, with some policymakers potentially backing away from earlier projections that rates would fall this year.

Both Pearce and Mester said they expect the central bank to drop the dovish bias from its policy statement.

“Hawkish chatter around the Federal Open Market Committee has become much louder, but the bar for a rate hike is high, and we still expect an improving inflation outlook to justify cuts by year-end,” Pearce wrote in an analysis.

Pearce said he expects Warsh to balance rising inflation concerns against signs that underlying price pressures could still ease.

“While Warsh is generally perceived as dovish, he will inherit a Committee that has become noticeably more hawkish,” EY-Parthenon chief economist Gregory Daco said in a statement responding to the CPI data.

“Warsh’s first challenge will not be steering the Committee toward easier policy, but demonstrating that his decisions are grounded in economic fundamentals rather than political considerations,” he continued.

Warsh’s dovish reputation appealed to Trump as he weighed candidates to replace former Fed Chair Jerome Powell.

Trump has repeatedly called for lower interest rates, often prompting concerns among some economists and Fed observers about preserving the central bank’s independence. He also went after Powell personally, calling him a “moron” and “numbskull” for not cutting rates quickly enough.

In an interview earlier this month, Trump responded to rising expectations among investors that a rate hike is likely by the end of the year, saying, “There’s no reason to raise interest rates.”

“We built the country by doing great and having rates low. What they do is when they raise interest rates, they try and kill success. I don’t want to kill success. We should actually lower interest rates,” Trump added, in the interview on NBC News’s “Meet the Press.”

Mester praised Warsh as a thoughtful, smart and experienced central banker and said she’s confident the new Fed chair will make decisions independent of political pressure. But she acknowledged the challenge Warsh is likely to face navigating the president’s public criticism.

“He’ll have to deal with some of the comments from the president as well,” Mester said. “It’s unfortunate that he’s going to have to do that, but he will have to just keep articulating the rationale for the Fed’s policy decisions.”

Myrow noted Powell was often put in a difficult position of navigating a relationship with the president and said Warsh will likely face similar challenges.

“Trump has a history of running into issues with his own appointees, so if the data continues in this direction, I just think Warsh is going to be increasingly between a rock and a hard place,” Myrow said.

But the economist noted that Warsh has just one vote on the committee and he also has to focus on setting the right tone for his tenure.

“It’s not up to Warsh alone. He has to be able to bring a majority of the FOMC along with him, and that’s going to be a real challenge right now,” Myrow said. “The more aggressive he is, the more he could undermine his position with the FOMC.”

“He’s caught between trying to please the president, or at least not upset the president, and build consensus with his new colleagues,” he continued.

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Jerome Powell

Kevin Warsh

Loretta Mester

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