Here’s what the appointment of Warsh to the Fed could mean for interest rates this year

After President Trump on Friday nominated former Federal Reserve governor Kevin Warsh to lead the central bank, market participants quickly began speculating what his chairmanship would mean for the path of interest rates this year.

If confirmed by the Senate, Warsh will face a deeply divided Fed at a time when the 19-member committee has set up the potential for a long pause in cutting rates. Many members feel the central bank has done enough to shore up concerns about softening job growth with three rate cuts last fall.

JPMorgan chief economist Michael Feroli said he thinks Warsh will make the case for rate cuts, but persuading the rest of the committee will be the bigger challenge.

Read the latest updates and reactions to Trump’s Fed chair pick

“While committee members are always open to better arguments, special deference to the chair only goes so far,” said Feroli. “It may appear that the committee always goes along with the chair, but we believe that’s largely a function of past chairs positioning themselves closer to the center of the committee.”

Said Matt Luzzetti, chief US economist for Deutsche Bank: “Warsh will have to convince his colleagues that rate cuts are appropriate this year, an argument that is unlikely to win unless the labor market shows renewed signs of weakening or inflationary pressures ease materially later this year.”

Underscoring Warsh’s challenge, St Louis Fed president Alberto Musalem said he thinks the current level on rates of 3.5% to 3.75% is at neutral — a level designed to neither boost nor slow economic growth. With inflation still above the Fed’s 2% goal, Musalem said he does not favor cutting rates now.

“With inflation above target and the risks to the outlook evenly balanced, I believe it would be unadvisable to lower the rate into accommodative territory at this time,” said Musalem.

At the same time, Fed Governor Chris Waller said Friday he dissented at this week’s meeting, preferring to cut rates by a quarter point, because he says the job market remains weak. “Let this sink in for a moment — zero job growth versus an average of almost 2 million for the 10 years prior to 2025. This does not remotely look like a healthy labor market,” he said.

In a huddle with reporters Friday, Trump was asked whether Warsh would commit to him that he will push to cut interest rates.

“No, but we talked about it, and I’ve been following him, and I don’t want to ask him that question. I think it’s inappropriate, probably would be allowed, but I want to keep it nice and pure,” Trump said. “But he certainly wants to cut rates. I’ve been watching him for a long time.”

When asked whether he has concerns about Warsh’s hawkish leanings historically, Trump said, “I’ve had times when I think you’ve had to really have rate hikes too.”

Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments

Warsh has argued for lower interest rates on the belief that AI will significantly boost productivity and push down inflation. Like Trump, he rejects the belief that inflation is caused by the economy growing too fast and workers getting paid too much. Rather, he argues inflation is caused by the government spending too much and printing too much money. He also believes any inflation from tariffs will be a one-off.

Historically, though, Warsh’s views have tended to skew toward higher rates and “tighter” policy. Notably, he has consistently criticized the Fed’s bond-buying programs outside of their use during the financial crisis for the risk of creating inflation as well as moving the Fed away from its core duties. Warsh also did not support cutting rates in September of 2024.

In recent comments, he noted that the Fed could bring down inflation by reducing the size of its balance sheet, which in turn could allow for lower policy rates.

“Because he has a hawkish reputation and is seen as independent, he is better placed to bring the FOMC along with him to deliver at least two and plausibly three cuts this year than some rivals,” said Krishna Guha, head of global policy and politics for Evercore ISI.

Guha said the questions are more around 2027 and 2028 and whether Warsh will continue to favor lower rates on high productivity or would turn hawkish if productivity disappoints and inflation mounts, especially if driven by easy fiscal policy.

Feroli added that as time goes on, Warsh’s leanings toward rate cuts may be more open to revision and perhaps reversion back to a more hawkish view, particularly after midterm elections and into the last innings of a lame-duck administration.

Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance, she covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram.

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