"New Fed Communications Agency": Trump picked Waller mainly to cut rates, but the market has already started betting on rate hikes.

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Trump personally picked Kevin Warsh to lead the Federal Reserve, with the original intention of pushing for rate cuts. However, as inflation continues to heat up and the bond market experiences violent fluctuations, the direction of market bets has quietly reversed—the next step may be a rate hike, not a cut.

Warsh will be sworn in as Fed Chair at the White House on Friday, becoming the first Fed leader to be sworn in at the White House since Alan Greenspan in 1987. This will also be his first public appearance with the president since he was nominated by Trump in January.

According to Nick Timiraos, a renowned Wall Street Journal reporter and the new Fed “communication chief,” Warsh inherits a highly risky situation: rising inflation, climbing long-term Treasury yields, and more and more investors believe the Fed’s next move could be a hike, not a cut.

The impact of this situation is already being felt in the markets. Timiraos’ latest article notes that investors are abandoning bets on Fed rate cuts, pushing up bond yields, thereby raising overall borrowing costs.

When Trump was interviewed by the Washington Examiner this week and asked whether he could accept Fed rate hikes under Warsh’s leadership, he gave a vague answer: "I’ll let him do what he wants to do." According to James Egelhof, chief U.S. economist at BNP Paribas, this statement further broadens the expected range for Fed policy direction under Warsh, and "supports the repricing in the bond market toward rate hikes."

Iran War and AI Boom: Dual Pressures Disrupt Rate Cut Agenda

The macro environment Warsh faces as he takes over is entirely different from what Trump originally envisioned.

About a month after Trump nominated Warsh in January, the U.S. launched a war against Iran, resulting in the closure of the Strait of Hormuz, persistently high energy prices, and heightened inflationary pressures. This marks the second time the Trump administration has asked the Fed to turn a blind eye to price pressures related to its own policies—previously, the administration had also asked the Fed to take the same stance regarding tariffs-induced inflation.

Meanwhile, the boom in artificial intelligence is becoming a driver for demand and growth, pushing up prices rather than relieving them in the near term. Some analysts believe that the bond market sell-off not only reflects inflation concerns, but also signals a “new normal” of high interest rates shaped by expanding government deficits and AI-driven productivity gains.

Joseph Lavorgna, chief economist at SMBC Americas, wrote in a client note this week that due to the impact of the Iran war, the Fed may need to hike rates by about 1 percentage point, offsetting the three rate cuts implemented in the second half of 2025. He bluntly stated: "I don't think anyone credible can say the Fed should cut rates now."

White House and Markets at Odds: Narrative Fractures Appear

Faced with the gap between rate cut expectations and market realities, two key Trump administration economic officials stepped forward this month, attempting to bridge the divide.

Treasury Secretary Scott Bessent stated on CNBC last week that the inflation that is currently pushing up interest rates is merely a "temporary supply shock" that the Fed can choose to ignore, predicting that after "one or two more hotter-than-expected inflation readings," price pressures will ease significantly. White House National Economic Council Director Kevin Hassett made a similar statement a few days ago on Bloomberg TV, saying "it is very likely we will see rate cuts this year because of Kevin Warsh."

However, the trajectory of the bond market runs counter to this narrative. Timiraos cites some economists saying that if the Fed stands pat while inflation keeps rising, it effectively means monetary policy has already become easier.

Steve Englander of Standard Chartered wrote in a client note this week: "If Warsh’s independence is unquestionable, we are likely to predict rate hikes between late 2026 and 2027." But he believes political constraints have not been eliminated, and expects rates to stay unchanged until 2027.

Warsh’s Political Capital and Test of Independence

Whether Warsh can carve an independent path amid political pressure and economic realities is the core issue the market is most concerned with.

According to the Wall Street Journal, citing three sources, before last month’s Senate confirmation hearing, Trump repeatedly called Warsh to ask about the economic situation. Warsh’s allies believe this direct communication channel is his unique advantage over his predecessor Jerome Powell—Powell never considered influencing the president as part of his duties.

Steven Blitz of TS Lombard pointed out that if Warsh wants to pursue a policy Trump may not favor, the key internal move would be "first securing Bessent’s support."

At his confirmation hearing, Warsh himself declined to provide any forward guidance on potential policy trade-offs, stating he would decide policy direction based on actual circumstances and had not made any commitments to Trump regarding rate cuts.

BNP Paribas’s Egelhof believes that the first weeks and months of Warsh’s leadership of the Fed will be critically important.

Warsh has spent most of his career warning that central banks must take a tough stance on inflation, and the conditions that are now pushing the rate cut agenda into a corner are, in fact, a historical opportunity for him to prove his credibility. "This is a test," Egelhof said, "but at the same time, it’s a huge opportunity."

Risk Warning and DisclaimerThe market has risks; investment requires caution. This article does not constitute personal investment advice, nor does it take into account the unique investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions in this article fit their own circumstances. If you invest accordingly, you do so at your own risk. ```