Six years ago, Powell misjudged inflation. Will Waller make the same mistake this time?

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Kevin Warsh is about to take over the Federal Reserve, but he faces a thorny policy legacy—rekindled inflation, deepening internal divisions, and political pressure from the White House. This scene is strikingly similar to Powell’s misjudgment of inflation six years ago, except this time the external variables are even more complicated.

According to the Wall Street Journal’s Wednesday report, the Senate is expected to formally confirm Warsh as Fed Chair this week. Just ahead of the confirmation vote, the U.S. Bureau of Labor Statistics released April’s CPI data showing consumer prices were up 3.8% year-on-year, marking the largest monthly year-on-year increase in nearly three years, and surpassing market expectations of 3.7%. Core CPI (excluding food and energy) accelerated 0.4% month-on-month, higher than March’s 0.2%, rising to 2.8% year-on-year.

Nick Timiraos, dubbed by some as the “new Fed journalist,” noted that this CPI report is the latest signal—suggesting that the previously priced market expectations for rate cuts are no longer a foreseeable prospect for 2026. Traders now increasingly believe the Federal Reserve may not cut rates at all this year, with some institutions even beginning to discuss whether rate hikes are needed.

For Warsh, who is about to take command of the Fed, the core risk of this dilemma is: regardless of whether he follows political pressure to cut rates early or sticks to the inflation target and maintains rates, both paths will have far-reaching impacts on the Fed’s credibility and independence.

Powell’s Legacy: A Costly Misjudgment

Measured by the core responsibility of price stability, Powell’s eight-year term leaves behind a record of “significant failure.”

Powell’s most representative policy mistake occurred between 2020 and 2022. At that time, the Fed introduced a new monetary policy framework, explicitly stating it would tolerate higher inflation in the short term to achieve a long-term 2% average inflation target.

Subsequently, under the combined effect of large-scale fiscal stimulus and persistently low interest rates, inflation soared sharply, reaching an annual peak of 9.1% in June 2022. Powell continued to characterize this inflation as “transitory,” missing the window to tighten policy early.

Although Powell later admitted the Fed should have hiked rates sooner and the subsequent tightening cycle successfully avoided a recession, inflation never returned to the 2% target. The Fed was forced to repeatedly halt rate-cut cycles as inflation’s resilience continued to exceed expectations. Now, the unexpectedly strong rebound in April’s CPI data means this problem remains unresolved as Powell leaves office.

April CPI: Structural Inflation Pressures Emerging

The alarming aspect of April’s inflation data lies not only in the headline numbers but also in its internal structure.

Looking at the components, housing prices rose 0.6% month-on-month, non-energy service prices as a whole increased 0.5%, and the year-on-year gain reached 3.3%. Apparel prices rose 4.2% over the past year, and appliance manufacturer Whirlpool announced a 10% price hike in April. Meanwhile, inflation has outpaced wage growth; real average hourly earnings fell 0.3% year-on-year, marking the first negative growth in three years.

Timiraos focused on structural changes in inflation. He pointed out that service sector prices—excluding energy and housing—rose in April, complicating the dovish narrative. Previously, doves argued that inflation pressures would be confined to goods, explainable as fading tariff effects, and thus the Fed need not discuss rate hike scenarios. But service sector inflation typically reflects domestic demand, rather than one-off supply shocks, and is harder to ignore.

Timiraos also mentioned that airfares jumped sharply—potentially driven by Iran war-induced jet fuel cost increases or reflecting broader domestic price pressures—making signals hard to identify and further blurring policy judgment. He emphasized that what the Fed truly fears is not the single month’s data but a revival of public inflation expectations: once consumers and firms believe high inflation will persist, wage-price spirals may self-reinforce, and even if the economy slows, the Fed will find it hard to cut rates quickly.

Warsh’s Dilemma: Rate Cuts or Not, Both Are Risky Roads

Warsh inherits a situation many economists describe as “impossible.”

From the inflation side, the Iran war’s energy shock is fueling price increases, accounting for about 40% of April’s CPI rise. The Wall Street Journal pointed out that if rate cuts are too aggressive to address an energy shock, inflation could accelerate; if rate hikes are used to counter this temporary oil price shock, recession could ensue.

Politically, the Trump administration continues to push for rate cuts. Treasury Secretary Bessent refused in a Senate Banking Committee hearing to promise that Warsh would not be sued if he fails to cut rates as Trump wants, saying it “depends on the President.” Trump had previously made it clear that if Warsh shows any intention of raising rates, he will not be nominated.

Internally, last month’s Federal Open Market Committee (FOMC) saw the most dissenting votes since 1992—three regional Fed presidents refused to endorse rate cuts, and internal resistance is building. Warsh will also face a Board of Governors and regional Fed president team that overlaps heavily with Powell’s era, including Powell himself—who intends to stay on as a board member until his term ends.

Timiraos noted the future direction of Fed discussions will largely depend on whether Persian Gulf fuel and commodity transport can return to normal. If disruptions persist, it will be difficult for internal discussions to marginalize the rate hike topic.

Challenges and Change: Can Warsh Take a Different Path?

The Wall Street Journal believes Warsh has the policy capabilities and intellectual resources to respond to these challenges. One of his plans is to start a comprehensive review of the Fed’s inflation models early on, to see if these models can provide more accurate policy signals—considered a pragmatic move directly targeting the root of “inflation misjudgment” that repeatedly appeared in Powell’s era.

Yet, Warsh also faces resistance from establishment figures. Former Fed chairs Ben Bernanke and Janet Yellen, along with Democratic economists, do not agree with Warsh’s stance in challenging the post-financial-crisis monetary policy framework.

The irony of history is that Powell paid a heavy price for characterizing inflation as “transitory.” Today, the inflation environment Warsh inherits is equally uncertain, with temporary energy shocks intertwined with structural pressure in services inflation, and muddled policy signals. Whether the lessons of six years ago are truly learned may be the most important test of Warsh’s tenure.

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