Kevin Warsh is now stepping into one of the most difficult jobs at a time when inflation is rising again, energy prices are climbing because of the Middle East conflict, and confidence in central banks remains fragile. What immediately stands out is that Warsh is not another Jerome Powell. He has spent years criticizing the Federal Reserve itself, arguing that many of today’s economic problems were created by central bank policy rather than solved by it.
One of Warsh’s most important positions is his rejection of the idea that inflation was merely the result of supply chain disruptions or temporary events. He has repeatedly argued that excessive government spending and Federal Reserve policy fueled inflation. Reuters summarized his position by noting that Warsh views inflation as a consequence of policy decisions and has been highly critical of the expansion of the Fed’s balance sheet. That is a significant departure from the excuses that dominated the discussion over the past several years.
What I find interesting is that Warsh appears determined to dismantle many of the communication tools that have defined modern central banking. He has criticized “forward guidance,” questioned the value of constant forecasts, and appears to favor a much less predictable Federal Reserve. Markets have become addicted to every word spoken by central bankers. Investors now spend more time trying to decipher press conferences than studying the underlying economy. Warsh seems to believe that central banks should stop pretending they can micromanage expectations years into the future.
When he was sworn in, Warsh pledged to “lead a reform-oriented Federal Reserve” while “learning from past successes and mistakes” and “escaping static frameworks and models.” The Federal Reserve has increasingly become an institution trapped by its own theories. The economy changes while the response remains the same.
The irony is that Trump may have selected someone who agrees with him about the failures of Powell and the Federal Reserve, yet disagrees with him on the solution. Warsh believes the Fed lost credibility because it waited too long to fight inflation. Trump wants growth and lower borrowing costs. Those objectives can coexist for a while, but if inflation remains elevated because of war, energy prices, or government spending, Warsh may find himself making decisions Trump does not like.
The larger issue is that no Fed chairman controls the business cycle. This is where politicians always get it wrong. Trump wanted lower rates. Biden wanted lower rates. Every administration eventually wants lower rates. Yet interest rates ultimately move with confidence and capital flows. The mainstream Keynesian view has always assumed rates are simply a policy tool. History shows something very different. Rates generally rise with strong markets and confidence and decline during bear markets and economic contractions. The Federal Reserve follows the trend far more often than it creates it.
Warsh enters office during what our models have projected as a Panic Cycle year. The international war cycle is turning up, government debt continues expanding, and geopolitical uncertainty is increasing. Investors expecting a magic solution from a new Fed chairman will likely be disappointed. Warsh may reform how the Fed communicates. He may challenge some of the assumptions that dominated the Powell era. But the real issue remains confidence. If confidence in government continues declining while geopolitical tensions continue rising into 2027, then no central banker will be able to prevent the consequences. The Fed does not control the cycle. The cycle controls the Fed.