Warsh takes his Chair

While the Federal Reserve (Fed) may appear more divided, more political, and either less willing or less able to guide markets as clearly as before, we believe concerns about lasting institutional damage are overstated. The most meaningful change to the Fed under a Kevin Warsh chairmanship is likely to be in how monetary policy is communicated and interpreted rather than a fundamental shift in how the central bank operates. We anticipate market volatility around this transition but do not assume a clear directional change in interest rates.

What happened?

Kevin Warsh was confirmed as the 17th chair of the Federal Reserve on 13 May in a 54–45 Senate vote — one of the most partisan confirmations in modern Fed history (see Figure 1). He formally took over on 15 May, bringing Jerome Powell’s eight-year tenure as chair to an end. The first Federal Open Market Committee (FOMC) decision under the new Chairman is on 17 June. We will watch his press conference closely.

Is this a regime shift or just a leadership change? 

Some commentators have described the end of former chairman Jerome Powell’s term as “regime change”, borrowing a phrase Warsh himself used in a CNBC interview last year.¹ We think that overstates the case. It is entirely natural that a transition after an unusually long incumbency will generate uncertainty about what comes next, but we are cautious about over- extrapolating a change in view from the change in personnel alone. 

How much power does the Fed chair really have?

The “C” in FOMC stands for Committee: The chair can set the agenda, frame the discussion, and shape the tone of public communication, but it cannot overrule the other voting members. This matters more today than at any point in recent memory. 

The April FOMC meeting produced the most policy disagreement within the Committee since 1992, with four of twelve voting members dissenting against either the rate decision or the policy statement.² That level of internal debate is unlikely to disappear simply because a new chair takes the gavel, and indeed the internal debate may well increase, in our view. 

Jerome Powell’s decision to remain on the Board of Governors — the first time a departing chair has done so in nearly 80 years — adds a further dimension. His views may still carry meaningful weight in policy discussions, and we suspect his institutional credibility may leave the Committee somewhat more hawkish than it would otherwise have been under new leadership had Powell departed. Continuity of recent thinking within the Committee should therefore not be underestimated, in our view.

Will the Fed’s policy framework change?

The institutional architecture of the Federal Reserve has survived far more disruptive transitions than this one, in our view. The dual mandate — price stability and maximum employment — is enshrined in statute and is not subject to the chair’s personal preferences. The policy rate remains at 3.50–3.75% (as of 15 June), where the FOMC has held it steady for three consecutive meetings, and we think recent communication still points to a data-dependent approach with a bias toward patience.

Warsh has signaled that he may adjust certain operational tools — favoring “trimmed mean” inflation measures over core PCE³, reducing the frequency of forward guidance, and potentially retiring the dot plot — but these are changes to communication and measurement, not to the fundamental framework of stable prices and full employment. 

Will politics influence the Fed under Chair Warsh?

Warsh’s confirmation hearing was notable for an explicit commitment to Fed independence: When asked whether President Trump had pressed him to pre-commit to rate cuts, Warsh replied that the president “never asked me to predetermine, commit, fix, decide on any interest rate decision … nor would I ever agree to do so.”⁴ We suspect markets may see less forward guidance than before, but we do not anticipate them questioning the Fed’s credibility.

What does the economic backdrop mean for monetary policy?

Arguably more significant than the leadership transition itself is the economic environment into which Warsh is stepping. The macro signals are genuinely conflicting. May’s headline CPI came in at 4.2% year-on-year — a three-year high — while producer prices surged 6.4%, which we think is largely due to energy costs linked to the Middle East conflict.⁵ Core and supercore CPI are trending higher. But should oil prices settle lower now that the situation in the Middle East may be improving, inflationary pressures could moderate.

At the same time, we think the labor market is improving, with the three-month average pace of job growth recently hitting a two-year high.⁵ Jobless claims also remain low. But wage pressures are in a range that the Fed should find acceptable, we think.

It is hard to look objectively at the current economic data and argue for rate cuts, in our view. But, we think calling for rate hikes now is premature. Watching and waiting is likely the best course of action for the Fed at this time.

The volatility of the incoming data itself is a policy challenge. A rigid Fed reaction function — whether hawkish or dovish — risks being wrong-footed by the next data release. Warsh’s stated preference for less frequent forward guidance may, in this context, be a pragmatic response to genuine uncertainty rather than an ideological choice.

A logical consequence of conflicting macro signals is that we could hear more dissenting voices on the Committee. That would contrast the near-unanimity that characterized much of the Powell era. We would argue that visible disagreement within the FOMC is not, in itself, a negative signal. In an environment where the balance of risks is genuinely uncertain, a committee that debates openly is more likely to arrive at better policy outcomes than one that presents a false consensus, in our view. History, shows that there has been plenty of dissent in the past and other central banks, such as the Bank of England, are relatively open around dissenting voices.

What are Warsh’s plan for the Fed balance sheet?

Warsh has argued for a smaller balance sheet, favoring a gradual reduction in the Fed’s holdings of Treasuries and mortgage-backed securities accumulated during years of quantitative easing. This would effectively tighten policy by lowering Fed demand for government bonds, likely putting upward pressure on longer-term Treasury yields and tightening overall financial conditions without having to change the policy rate.

What does a Warsh Fed mean for markets?

The most likely outcome is not a clean policy pivot but a noisier Fed — one that offers less reliable forward guidance and, as a result, generates higher interest rate volatility. Markets are already pricing this in to some extent: as of mid-June, markets expect rates to remain broadly unchanged through the remainder of 2026, with some even pricing in a possible rate hike by early 2027 (see Figure 3) versus expectations for rate cuts seen at the start of 2026.

• Rates and fixed income: The economic backdrop argues against a sustained rally in Treasuries. Instead, we see a more tactical environment in which bond prices respond more sharply to incoming data and to shifts in FOMC communication. The 30-year yield moving above 5% in anticipation of the transition is an early example of this dynamic.⁵
• US dollar: There may be episodes of near-term strength if markets interpret Warsh’s transition as hawkish. We would view those as opportunities rather than the start of a new trend. Our medium-term bias remains for a weaker dollar, supported in our view by a potentially more politicized policy backdrop, less clarity around the reaction function, and the dollar’s high value compared to history.6 In practice, we think bouts of USD strength may present tactical opportunities to position for renewed weakness.
• Equities and real assets. A Fed that is harder to read may weigh on rate-sensitive sectors and increase the equity risk premium, but it also reinforces the case for diversification into assets — such as real estate, commodities and infrastructure — that offer a degree of inflation protection and are less correlated with short-term policy expectations, in our view.

Investment risks

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