Trump trusts Fed Chairman Warsh. It matters more than interest rates

When Kevin Warsh takes the stage Wednesday for his first news conference as chairman of the Federal Reserve, he will enjoy something his predecessor Jerome Powell lacked for years: breathing room from the president.

“The president trusts Warsh, so he’s going to have a part to play,” said a person familiar with Trump-Fed dynamics, speaking on condition of anonymity to describe what has been one of the administrations’ most volatile relationships.

The new Fed chairman will try to use that freedom to make his case internally for long-term change at the Fed, people who know him and closely follow the central bank said. Warsh’s reform agenda includes moving the Fed slowly toward the low rates that Warsh has approved and shrinking the institution’s balance sheet by trillions of dollars and changing the way it thinks about inflation. Doing so will require carefully mobilizing the broad but not limited political capital that comes with his new position.

Warsh comes as the US economy appears strong, and a pending deal to end the Iran war could ease inflation worries. While Warsh may not be able to deliver the immediate interest rate cuts that President Donald Trump has sought, the new chairman is already getting a break from a president who took unprecedented steps to undermine the Fed under Powell.

Powell has repeatedly said that he and the Federal Open Market Committee base their interest rate decisions solely on economic factors, but Trump was convinced otherwise. He saw politics everywhere.

Markets are widely expecting Warsh this week to announce that the Fed is holding interest rates steady, as Powell has done since December. Trump would not see that as a betrayal, the person said. “I think that the trust of the president is worth a lot of space because the president thinks that he is doing as he sees fit and not that he wants to avenge him,” said this person.

Trump has said in recent days that he wants Warsh to “do whatever he wants” and be “completely independent.” The Fed is legally independent and reports to Congress, not the president.

Warsh said at his confirmation hearing in April that he is willing to hear from the president and anyone else on interest rates, but the final call goes to the Fed. “Humble central bankers must listen and make their own decisions,” said Warsh.

The White House did not respond to a request for comment on the Trump-Warsh relationship. The Fed declined to comment on Warsh’s plans for the meeting and his relationship with the president.

How long that relationship lasts is a matter of great speculation in Washington. Trump has a long history of turning on his political allies.

Warsh will need to quickly consolidate his support among the 12 voters on the Federal Open Market Committee, which is made up of the president of the New York Fed, a rotating set of four other regional Fed bank presidents and seven permanent members of the central bank’s Board of Governors.

“The seat has a lot of flexibility,” said Jon Faust, a Johns Hopkins University economist who was a longtime adviser to Powell. “But a chairman who chooses to push too hard in any direction will get into trouble with the board or the committee, whichever is appropriate.”

The Fed’s chief proponent of cuts, Stephen Miran, resigned his seat to make way for Warsh. Another governor who favored cuts, Christopher Waller, said in May that a rate hike may be necessary if inflation does not abate.

The Fed is legally committed to keeping a certain rate of inflation known as core personal consumption expenditures below 2%. Core PCE came in at 3.3% in the latest reading.

The war in Iran has driven up energy prices, raising the cost of gasoline in the US, among other price increases. That has led some Fed members, including Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack, to suggest rates may need to rise this year.

If the Strait of Hormuz is reopened to shipping as envisioned in the US-Iran deal announced Sunday, Warsh will have a better basis to make his long-standing case that artificial intelligence is helping the economy grow without damaging inflation.

Neither war nor Trump’s tariffs are doing the US economy a whole lot. Labor Department data for May showed that 172,000 jobs were created, while the unemployment rate stood at 4.3%.

Traders have picked up on expectations of a cut in January when Warsh was tipped to expect at least a quarter-point increase this year, according to CME FedWatch.

Warsh has an opportunity to reset how the Fed approaches those market expectations.

The Fed’s main policy statement, which is updated at each FOMC meeting, currently contains what is known as an “easy bias,” a phrase that says the Fed is looking for more opportunities to cut rates. Three members of the Fed opposed Powell’s last meeting, in April, saying they wanted to remove bias.

“My strong opinion is that the sentence will be commuted, which will eliminate all three who are at odds,” said Mickey Levy, a visiting fellow at the Hoover Institution and a longtime colleague of Warsh’s.

Warsh will bring a new relationship with the Fed’s opponents. Powell worked with voters before the meetings to try to forge a consensus, and disagreements were rare, making the three-member opposition in April more prominent.

“Kevin won’t be like that,” Levy said. “He won’t pay attention to the opposition, and he won’t treat you.”

Warsh calls it his favorite method A “family battle,” or a fierce debate within the Fed. “I prefer cleaner memos and messier meetings,” Warsh said at his confirmation hearing in April.

He criticized the Fed’s practice of recording and documenting two full days of FOMC meetings, which he believes reduces friction.

Former Minneapolis Fed President Gary Stern was on the FOMC in the 1990s when Chairman Alan Greenspan revealed that the Fed was recording meetings. “It affected the nature of the conversation and the conversation, not for the better,” Stern told CNBC.

But Warsh will need to spend a lot of political capital to quickly change the way conventions work, and he may save that for other priorities.

“That’s the kind of calculation he’ll be doing on all sides,” said Faust.

The top staff Powell appointed to stay in place. Warsh hired two Fed outsiders as interim policy advisers, but made no other major staff changes.

Warsh also gets from Powell an informal decision-making system known as the troika, an informal group of the Fed chairman, vice chairman and president of the New York Fed. Philip Jefferson has been vice chairman since 2023, and John Williams has led the New York Fed since 2018.

“The troika is a sounding board about where policy should go,” Faust said. Warsh could informally suggest another group of advisers, but because the vice chairman and president of the New York Fed have inherent authority, they are a useful place to start building consensus, he said.

CNBC has learned of a quiet effort to persuade Warsh to encourage Williams to retire early and schedule their vacancies two years in advance. There is no indication that Warsh was involved in this effort. Williams will reach the mandatory retirement age of 65 for Fed presidents in June 2028.

The Washington-based Fed’s board is heavily involved in selecting regional Fed presidents, including New York, and must vote to approve the final selection.

Reforming the troika is an area where Warsh will need political capital, Faust said.

The New York Fed declined to comment.

Another obstacle in Warsh’s path will be the markets, said Mark Spindel, founder and chief investment officer of Potomac River Capital and a Fed historian. “Who is the eighth ruler in the room? The bond market.”

Warsh said he wants to change the way the Fed measures inflation, saying he is unimpressed by the PCE core. But he does not specify exactly what he would like to change. That may be by design. Going too far in making quick changes to something as important as the Fed’s inflation rate could cause a backlash from voters and workers.

The unclear path forward has ramifications for the market, Spindel said.

“As bond traders and income investors, we will want more yield to answer that we don’t know what this guy is doing,” he said.

Some but not all of those answers will come on Wednesday. That might be enough for Warsh.

Warsh will be able to “buy himself some time” at Wednesday’s meeting by taking potential points of agreement — such as holding interest rates and removing the Fed’s dovishness — and presenting them as the result of his leadership style and the FOMC’s careful deliberations, Spindel said. That would allow Warsh to move forward on more challenging issues like inflation measures “without offending credibility, and certainly pleasing the guy in the Oval Office,” Spindel said.