Kevin Warsh takes over a divided Federal Reserve

When Jerome Powell became chair of the Federal Reserve in 2018, the U.S. economy was chugging along at 3% annual growth powered by a robust labor market. A consensus had formed among Fed policymakers at the time in favor of gradually raising interest rates to keep growth in check.

Powell’s successor won’t enjoy the same luxuries.

Kevin Warsh, a former central bank governor turned staunch Fed critic, is on track to succeed Powell as the next Federal Reserve chair. The Senate voted Tuesday to confirm Warsh for a 14-year term on the Fed’s Board of Governors, with a separate Fed vote as soon as Wednesday expected to formally make Warsh the new Fed chair. Most Democratic senators opposed his nomination, believing Warsh failed to demonstrate at his confirmation hearing that he won’t simply carry out President Donald Trump’s bidding to slash interest rates.

Warsh will grapple with a set of economic and political circumstances that would bedevil even the most experienced economists and monetary policymakers. Inflation is running at a three-year high as the Iran war unleashes a spike in gas prices filtering throughout the U.S. economy. A supply shock to commodities — such as crude oil and fertilizers — isn’t expected to abate anytime soon, with the Strait of Hormuz closed to most commercial shipping.

Those trends weaken the case for the lower interest rates that Trump repeatedly and vocally demanded from Powell — and seems likely to demand from Warsh in the near-future. Trump has already joked about suing Warsh if he doesn’t the rate cuts he wants. With the economy facing fresh headwinds, Warsh is poised to get caught between a volatile president expecting him to endorse cuts and his responsibility to keep monetary policy decisions insulated from politics and the executive branch.

“Warsh is going to land into a very challenging situation at the Fed,” said Ryan Chahrour, an economics professor at Cornell University. “Warsh is an inflation hawk by inclination, but President Trump expects him to behave like a dove.”

Over the years, Warsh cultivated a professional reputation as an inflation hawk — a policymaker who prioritizes taming inflation over propping up the job market. But he can’t adjust interest rates without drawing a majority among 12 voting members of the Federal Open Market Committee. Powell has said he’s staying on as a Fed governor until threats to the Fed’s independence subside. He indicated he plans to keep a lower profile to avoid being viewed as a backseat driver.

During Powell’s last year at the Fed, policymakers dealt with Trump’s sweeping tariffs that rippled through the economy as price increases, and a 42-day government shutdown that delayed economic data releases. The central bank endorsed three interest rate cuts in a row until pausing the campaign earlier this year, settling on 3.50% to 3.75% benchmark rate.

The Fed sat still again on interest rates during its most recent two-day meeting in April. But consensus about what to do next is fraying. Three Fed governors on the FOMC are entertaining rate hikes as a possible measure to keep the economy on track. April’s meeting ended with the most dissents on a Fed policy statement since the early 1990s.

“Inflation is moving away from target while unemployment is on target. Central bankers can really only move in one direction when faced with these circumstances,” Neal Dutta, head of U.S. economics at Renaissance Macro Research, said in a social media post.

Some Fed observers believe Warsh will relent on lower interest rates at the start to devote more energy on executing “regime change” at the Fed. He strongly favors shrinking the Fed’s footprint

“To thread the needle, Warsh will need to get creative,” Chahrour said. “I would expect Warsh to be patient with short-term interest rates and to focus on making more procedural and institutional changes at the start of his term.”