New Fed News Agency: The Federal Reserve faces the most embarrassing power transition in its history

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In a complex economic and political environment, the Federal Reserve is about to experience its most complicated and unpredictable power transition in decades.

Renowned journalist Nick Timiraos, dubbed the "new Fed whisperer," recently wrote that Kevin Warsh, Trump's nominee for the next Fed chair, is facing the most awkward transition period in decades. The current economic situation is far more complex than when he promised to cut rates during his campaign for the position last year.

Even before the Middle East conflict pushed up energy prices, the inflation indicator most watched by the Fed was already moving in the wrong direction. The outbreak of war threatens to further push up inflation in the coming months. Market expectations have reversed, and many now believe the probability of a rate hike this year exceeds that of a cut.

Meanwhile, Warsh’s Senate confirmation process has stalled. This means that when the current Fed chair Jerome Powell’s term expires in two months, whether Warsh can successfully take over is a huge unknown. Warsh may ultimately walk into a pressured Federal Reserve: on one side is a president demanding lower rates, on the other skeptical colleagues, and Powell himself has suggested he may not leave.

Policy Divergence: From “Continuity” to “Institutional Opposition”

Even without these complex factors, this power transfer is destined to be unusual.

Nick Timiraos notes that Warsh has already pledged to break completely with his predecessor. In the past forty years, no incoming Fed chief has ever done this. Powell and his predecessors Yellen, Bernanke, and Greenspan all promised continuity with their predecessors to calm market nerves during the transition.

By contrast, Warsh has publicly criticized Powell’s Fed for its records in monetary policy and bank regulation over the past year. In a TV interview last summer, he called for “change” and rejected the premise that continuity with Powell was a good thing. He bluntly said, “Gosh, I think that’s the last thing we need.”

Core Conflict: Presidential Demands vs. Fed Reality

Trump has made clear his expectations for the next Fed chair. Before nominating Warsh in January, Trump said he would not appoint anyone who disagreed with his views on cutting rates.

However, the internal atmosphere of the Fed is changing. Powell led the central bank to cut rates three times last autumn, but each cut faced increasing resistance from the twelve-member Federal Open Market Committee (FOMC). At last week’s meeting, the Fed kept rates unchanged with an 11-to-1 vote.

Eric Rosengren, former president of the Boston Fed from 2007 to 2021, said: “He (Warsh) was nominated because he said he favored lower rates. But the world changes quickly, and he can’t guarantee the vote.”

This directly points to the variable most concerning to the market—policy executability.

Inflation and Oil Price Shock: Traditional Framework Fails

For the current oil price shock, the traditional central bank logic is to “ignore short-term inflation increases,” as slower growth and rising inflation offset each other. But the article points out, this premise is weakening.

Rosengren bluntly stated: “This strategy relies on the public believing prices will fall back, but after five consecutive years of above-target inflation, such trust is no longer a given.”

He further warned “If rates are cut in this environment, both within the committee and among the public, it may be seen as motivated by politics rather than economics.”

This means policy is not just a technical matter, but also one of credibility. This challenging start has not escaped the attention of central bank observers. Tim Duy, chief U.S. economist at SGH Macro Advisors, admitted: “The delay in Warsh’s nomination is a gift for him. I do not envy whoever gets this job right now.”

However, some experts are less pessimistic. James Egelhof, chief U.S. economist at BNP Paribas, stated: “The labor market is near full employment. Financial conditions are loose. Financial stability is strong. There’s plenty to do, but the transition should be manageable.” He pointed out that investors do not expect Warsh to immediately implement the sweeping reforms he has championed.

History’s Reflection and Future Uncertainty

The current oil price shock may be especially tricky for Warsh, as it sharply contrasts with his previous stance. In 2008, when energy prices soared, the policies Warsh advocated as a Fed governor were exactly opposite to what Trump now expects of him.

In April of that year, Warsh reluctantly supported a final 25-basis-point rate cut, and warned against encouraging “FOMC’s tolerance of inflation above prudent levels.” By June, as oil neared $140 a barrel and drove up inflation, Warsh endorsed market expectations that the Fed's next move was more likely a rate hike. At the time, he emphasized that inflation risk “continued to dominate as the greatest threat to the economy.”

Today, the Fed faces some key differences: benchmark interest rates are higher, and the financial system is more stable. But the underlying dilemma is similar: the oil shock forces the Fed to weigh which is the bigger threat—higher inflation or a weaker job market.

Warsh’s Senate confirmation hearing will be his stage for expressing his latest economic opinions. But due to a standoff between a Republican senator and the Justice Department on the criminal investigation into Powell, the hearing has not yet been scheduled. Powell said on Wednesday that if no successor is confirmed by May 15 when his term expires, he will continue to lead the Fed and will not leave the Board until after the investigation is “transparent and finally” concluded.

Nick Timiraos hints at the end of his article that the future path of monetary policy will be turbulent. When Warsh finally steps into the Fed building, Powell may not have left yet—once again proving that the job is nothing like he originally imagined. For the market, this uncertainty may intensify asset price volatility in the short term.

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