Kevin Warsh set to lead the US economy facing a 'very wide' range of outcomes as Iran war, energy shock, and labor uncertainty loom
If Kevin Warsh is confirmed to chair the Federal Reserve, he will step into one of the most powerful roles in economics just in time to inherit a major energy crisis, the fallout of which has already complicated the US central bank’s path forward on rate-setting policy.
The Fed’s dual mandate — stable prices and maximum employment — leaves the central bank between a rock and a hard place in an energy shock. Warsh, who served on the Fed throughout the 2008 recession, would take over at a moment when policymakers are confronting a critical problem for central banks.
Rising fuel costs typically lift headline inflation and can feed into broader price pressures, so-called “core” inflation, through more expensive goods and services, strengthening the case for keeping interest rates elevated or even tightening policy further.
Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments
At the same time, more expensive energy acts like a tax on households and businesses by squeezing disposable incomes and raising operating costs. That dynamic can slow consumption, investment, hiring, and overall economic growth — conditions that would normally argue for lower borrowing costs.
“The range of economic outcomes that could ensue from the war is very wide,” James Egelhof, chief US economist at BNP Paribas, wrote in a recent client note.
“The US economy is now confronted by an unknown but potentially significant energy price shock owing to the Iran war, which may sharply push up inflation while also creating downside risks to growth and employment.”
In March, consumer prices saw their largest monthly gain since 2022 as the war sent gas prices shooting past $4 a gallon. The Consumer Price Index for March showed headline prices rose 3.3% higher than a year ago while rising 0.9% on a monthly basis in a rapid acceleration from February’s levels, according to Labor Department data.
On Tuesday, US retail sales data printed above estimates, a bullish sign that Americans are continuing to spend. On balance, JPMorgan Chase economists wrote, “Incoming data continue to suggest encouraging momentum, which should help keep growth at a trend-like pace this quarter despite the oil drag.”
At the same time, the International Monetary Fund last week revised down its global 2026 growth forecast from 3.3% to 3.1%. IMF chief economist Pierre-Olivier Gourinchas noted that as the war continues, the global economy is moving toward an “adverse” scenario, in which growth could slow to 2.5% or even 2% — levels typically considered recessionary.
That the current crisis is driven by physical supply losses and shipping disruptions that the Fed cannot directly remedy, rather than demand-led inflation that can be tempered by economic policy, will only make the situation tougher.
As Iran and, in recent days, the US Navy have cut off nearly all transit through the Strait of Hormuz, the world’s most critical waterway for energy flows, global crude oil losses have already added up to roughly 500 million barrels.
Tens of millions of oil barrels’ worth of production shut-ins at the wellhead throughout the Middle East, damage to critical infrastructure in the LNG supply chain, and choked-off flows of products from the Persian Gulf, ranging from aluminum and helium to nitrogen and ammonium, have interrupted the global economy even further.
Kevin Warsh, U.S. President Donald Trump’s nominee for Chair of the Federal Reserve, departs following his Senate Committee on Banking, Housing, and Urban Affairs confirmation hearing in the Dirksen Senate Office Building on April 21, 2026 in Washington, D.C. (Andrew Harnik/Getty Images)
· Andrew Harnik via Getty Images
So far, the Federal Reserve under current Chair Jerome Powell has looked through the energy crisis, choosing to hold rates steady at a target range of 3.5% to 3.75% at the Federal Open Market Committee’s March meeting.
At a press conference after that meeting, Powell said that “the net effect of an oil shock will still be some downward pressure on spending and employment, and some upward pressure on inflation” — pressure on both sides of the dual mandate.
Traders are betting there’s a 69% probability that rates will remain at their current range through the end of 2026, according to CME Group data.
In past roles at the Federal Reserve and in recent public comments, Warsh has broadly supported lowering rates, even as he has remained relatively hawkish on the economy compared to other economic leaders such as Fed governor Stephen Miran.
The nuance for Warsh, Deutsche Bank economists wrote in a recent client note, “will be how he balances a desire to lower rates over time with an economic backdrop that does not call for rate cuts at present.”
The war in Iran and the energy supply crisis it has kicked off will not be Warsh’s only headache if confirmed to lead the Fed. Even as a recent Supreme Court decision ruled large swaths of President Trump’s signature tariff policy illegal, the president has said he intends to reinstate the wide-ranging economic penalties through other means.
Economists have broadly said that the tariffs, which increase the cost of imports, have raised prices, stoking inflation.
“Fed Chair nominee Kevin Warsh has argued that the Fed owns responsibility for any inflation overshoot, regardless of the cause,” Bank of America economists Aditya Bhave and Stephen Juneau wrote in a client note on Tuesday.
“But he’s also said that the Fed should look through the tariffs. Even as the tariff shock subsides, the Iran war poses further upside risks to inflation.”
Jake Conley is a breaking news reporter covering US equities for Yahoo Finance. Follow him on X at @byjakeconley or email him at jake.conley@yahooinc.com.
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