A New Era at the Federal Reserve: Warsh Takes the Helm Amid Inflation and Internal Strife

The Federal Reserve leadership transition from Chair Jerome Powell to Kevin Warsh occurred on May 15, 2025, with Warsh being sworn in on May 22. The new chair faces a complex economic environment characterized by rising inflation, a large central bank balance sheet, and internal disagreement within the Federal Open Market Committee (FOMC) regarding the future path of interest rates.

Leadership Transition

Jerome Powell's second term as Federal Reserve chair ended on May 15, 2025. He continues to serve on the Board of Governors until his 14-year term expires. President Donald Trump nominated Kevin Warsh as the 17th Fed chair since the central bank's founding in 1913. Warsh previously served as a Fed governor from 2006 to 2011.

President Trump and former Chair Powell publicly disagreed over interest rates during the past year. Trump called for rates to be cut to 1% or lower. Powell stated that economic data, not political pressure, would guide policy decisions and attributed elevated inflation to Trump's tariffs and energy supply shocks from the Iran war.

Inflation and Economic Context

The Bureau of Labor Statistics reported May's trailing 12-month inflation at 4.2%, a three-year high. Between February and May, trailing 12-month inflation rose from 2.4% to 4.2%. The inflationary surge is attributed largely to the closure of the Strait of Hormuz during the Iran war, which caused a major crude oil supply disruption, and tariff policies.

The S&P 500's Shiller P/E ratio stood at 42.32 on May 13, the second-highest ever recorded, below only the dot-com bubble peak. The historical average Shiller P/E is 17.36. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite reached all-time highs in the past year, partly fueled by artificial intelligence data center build-out.

Balance Sheet Reduction Plans

The Federal Reserve's balance sheet grew from under $1 trillion in August 2008 to nearly $9 trillion by March 2022. Quantitative tightening reduced it to $6.7 trillion as of May 6, 2026.

Warsh has criticized the size of the balance sheet and intends to reduce it to $3 trillion. Market observers note that selling long-term Treasury bonds could push yields higher, increasing borrowing costs for consumers and businesses.

Proposed Change to Inflation Definition

During his April 21 testimony to the Senate Banking Committee, Warsh stated his view that price stability should be defined as "a change in prices such that no one's talking about it."

This statement suggests a potential shift from the current 2% long-term inflation target established in 2012.

FOMC Actions and Dissent

Final Powell Meeting (April 29)

The FOMC held its final meeting with Chair Powell, leaving the federal funds rate unchanged at 3.50% to 3.75%. The meeting saw a record number of four dissents, which has not occurred in 34 years. One member voted for a quarter-point cut, while three members supported maintaining the rate but opposed the easing bias in the statement. Markets now consider additional rate cuts in 2026 unlikely. The federal funds rate had been cut six times between September 2024 and December 2025.

First Warsh Meeting (June 17)

The FOMC left the federal funds rate unchanged. In his post-meeting press conference, Warsh stated that "inflation remains elevated relative to the Committee's 2 percent goal."

Warsh attributed part of the inflation to supply shocks in the energy sector linked to the Iran war and tariffs, and criticized former Chair Powell for keeping interest rates low and expanding the Fed's balance sheet.

Warsh stated that "forward guidance isn't the business we should be in" and abstained from submitting his interest rate projections in the "dot plot." Nine of 18 other policymakers projected higher rates by the end of 2026. The consensus expectation was that the FOMC would shift from an easing bias to a neutral one.