Kevin Warsh enters the Fed facing a major ‘family battle’ to cut interest rates

If new Federal Reserve Chairman Kevin Warsh is looking for a “good family fight” over monetary policy, he might just get it if he sticks to his guns on lowering interest rates.

With inflation rising and Treasury yields rising, Warsh is likely to face the Federal Open Market Committee without relief. In fact, several recent officials have emphasized the need for the Fed to keep its options open for further rate hikes.

If it looks like outgoing Governor Stephen Miran has been the lone wolf crying out for cuts, the sight of the Fed chair trying to defy other policymakers and pushing for cuts will be even more dramatic.

Those who have watched Warsh over the years, from his early tenure as Fed governor to his high-profile public disagreement with Fed policy since, expect him to make strong arguments for cuts. The problem is, he is likely to lose at least in the short term, a situation that poses interesting communication problems for the new head of the central bank.

“I’ve seen him in action. He bases his decisions on his economic outlook, and even his statements about why he would like to lower rates in general are based on his reading of what’s happening structurally in the economy,” said former Cleveland Fed President Loretta Mester, who worked with the Philadelphia Fed during Warsh’s earlier tenure on the board. “I don’t think at this point he can make those arguments in a credible way, because we have a problem with inflation.”

Indeed, inflation will be Warsh’s first and foremost policy challenge.

Officially, Warsh echoed much of the Trump administration’s position on rising prices — especially that it is temporary and will disappear once the war in Iran ends and various forces of disinflation, such as rising output, take hold.

However, those arguments face a powerful audience now that inflation rates are at multi-year highs.

Warsh made the “family war” speech during his Senate hearings, comments, and other comments about the Fed, central bank watchers say could come back to haunt him.

At a recent meeting, in late April, three members of the Federal Open Market Committee, the central bank’s rate-setting arm, voted against the policy statement.

The vote went into one sentence in the absence of investors taking it which means that the next move will be reduced: “In considering the level and timing of further adjustments to the target range of the government’s monetary value, the Committee will carefully evaluate the incoming data, the emerging perspective, and the balance of risks.”

However, it’s just that disagreement that would allow Warsh to take a quick shot at the Fed. By convincing the balance of the other 11 FOMC voters to remove it, he will continue his disdain for such “forward guidance” while rallying the panel around a common goal, which is to preserve discretion to continue moves.

“You get a lot of counterintuitive thinking out there. Kevin Warsh is a very fortunate man with his experience. Family wars often lead to positive outcomes,” said Lou Crandall, chief economist at Wrightson ICAP and the Fed’s leading insider.

“On the other hand, he could present this as not a reinforcing signal, just a shift to a more informal communication framework,” he added. “There is PR that would be useful to him. He doesn’t have to say that the committee forced his hand in his first meeting so that we can go to a state with effective boundaries.”

Warsh’s troubles would not end, however.

President Donald Trump has appointed a new chairman with clear statements that he expects lower prices. If Warsh fails to deliver, it could set up the same type of relationship that Trump had with outgoing Chairman Jerome Powell: a constant conflict that saw personal attacks and eventually involved the Department of Justice, and an unprecedented level of disagreement between the administration and the central bank.

So is it possible that Warsh was left to present the committee’s decision, then said in his post-meeting news conference that he disagreed and tried but failed to persuade his supporters to vote for the cuts?

It’s unlikely, say those familiar with the inner workings of the FOMC, mainly because it will help undermine Warsh’s credibility.

“That will undermine his power as chairman. Part of the chairman’s job is to get the committee to reach a consensus.” said Mester, the former president of Cleveland.

While there is a perception that Fed officials walk into the boardroom and issue positions, Mester, who served in various positions at the Fed from 1985 to 2024, said it doesn’t actually work that way.

“Chairman Powell and the chairs in front of him, Ben [Bernanke] and Janet [Yellen]”They both made it a point to call each participant before the meeting so they know where people are,” he said.

Former Governor Miran, who is leaving the board with Warsh’s arrival, told Bloomberg News earlier this week that “it’s important to understand that people at the Fed are responding to conflicts.” Although he voted against each measure in the six meetings he attended, Miran noted that some officials “started to respond” to his arguments “but it’s taking time.”

Those who have worked with Warsh say he is up for the job, despite the negative circumstances surrounding the Fed’s current climate.

In addition to the basic issues of rates, the new chairman faces additional communication challenges.

He not only spoke against giving guidance, but also the “dotted plot” respected by the Fed for the expectations of the level of each official and showed doubts about holding press conferences after each meeting, a process that Powell started that deviated from the previous practice of quarterly meetings with the press.

Bill English, the Fed’s former chief of monetary affairs and now a professor at Yale, worked with Warsh and found him to be “good at working with people, and I think he’s going to try to find a reasonable compromise” among the myriad of issues ahead.

“At least from what I’ve seen over the years when he was governor, he doesn’t seem like someone who wants to fight the committee,” said English. “I think he will want to continue to be the chairman who will try to find consensus and move the committee over time with arguments and data.”