Tonight the world is watching: The Federal Reserve officially changes leadership—“the Waller era” has arrived!

```

Tonight, the global market's attention will be focused on an oath ceremony at the White House. Kevin Warsh will officially succeed Powell as Chairman of the Federal Reserve, marking the beginning of the "Warsh era."

But what he inherits is not a ready-to-go rate-cutting machine, but a central bank simultaneously besieged by rekindled inflation, tightening bond markets, and internal divisions.

This oath ceremony itself has already sent out unusual signals. In recent years, the inauguration of Federal Reserve Chairs usually takes place quietly within the Fed, and it is rare for the President to personally attend. The last similar ceremony held at the White House dates back to 1987 when Greenspan took office.

Trump's decision to host personally is both a gesture of courtesy and an unspoken pressure—he has pushed the boundary between White House and Federal Reserve power back under the spotlight.

Perfect Resume, but a Common Misconception

Warsh's resume looks like a meticulously crafted work.

Double degrees in economics and political science from Stanford, JD from Harvard, seven years at Morgan Stanley M&A, Special Assistant for the National Economic Council under Bush, appointed as Fed Governor in 2006 at age 35—one of the youngest ever. After leaving the Fed, he has remained connected to institutions like Stanford Business School, never truly stepping out of the policy circle.

He previously came close to the Chair position; during Trump's first term, he was a top candidate but was ultimately sidelined by Powell. Reports say Trump later publicly expressed regret over that decision. The remark is meaningful—it is both a belated affirmation of Warsh and a premature verdict on Powell.

This time, Warsh has his second chance.

The market previously held a deeply-rooted misconception: Trump picked him, so he will cut rates.

After QE2 following the financial crisis, Warsh voted in favor, but almost simultaneously criticized the policy in public—later researchers called this "silent dissent." He has long supported free trade, a strong dollar, been wary of debt expansion, and emphasized Fed independence. He is not someone without a stance—he just concealed it beneath consensus.

Trump chose Warsh because he didn't want another "uncooperative Powell." But he may find Warsh's "cooperation" comes with conditions.

This is the first key to understanding the Warsh era.

On Day One: No Good Cards for the Fed

On Warsh's first day in office, he faces a set of rather unsightly data.

April's CPI rose to 3.8% YoY, a three-year high. The Iran war pushed gasoline prices up 28.4% YoY, fuel up 54.3% YoY. If inflation was only from oil prices, the story would be easier: wait for oil prices to fall, inflation cools, the rate-cut window naturally reopens.

More troubling signals come from the services sector.

April services inflation rose 0.5% MoM, housing up 0.6% MoM, core CPI up 0.4% MoM—the fastest pace since late 2025. Food, healthcare, transport, entertainment—these rising prices can't be simply attributed to oil, and price pressure is spreading from energy to services.

This signal makes the situation trickier. In 2022, the Fed misjudged inflation as "transitory," and when sticky services inflation formed, they could only chase it with aggressive hikes. This lesson is etched into everyone at the FOMC. If Warsh pivots to rate cuts as soon as such signals emerge, it is a public admission: the Fed has learned nothing from 2022.

The consumer side also shows no signs of softening. April retail sales hit the strongest in eight months, the labor market hasn't stalled, and unemployment remains low. The "slowing growth + cooling inflation" combo needed for rate cuts—neither condition has appeared.

The bond market reacted first. After the data, 2-year Treasury yields breached 4%, 10-year rose to 4.56%, 30-year reached 5.19%, nearing the 2007 high. Wisdom Fixed Income Portfolio Manager Vincent Ahn bluntly stated: "Warsh hoped to have the option to cut rates on his first day, but the bond market has already removed it from the table."

This is the first blow the market gives the new Chair.

Balance sheet reduction is the second challenge.

The Fed's balance sheet is about $6.7 trillion, four times what it was when Warsh started in 2006. He has long criticized the Fed for expanding its balance sheet without sufficient retracement, resulting in excessive market intervention and inadvertently subsidizing federal financing.

The logic is clear, but execution is extremely difficult.

Reducing the balance sheet essentially means compressing the liabilities side. Treasury deposits and currency in circulation are beyond Fed control; overnight reverse repos had already neared zero in the previous round of balance sheet reduction. What’s truly flexible is bank reserves—and reserves are the most sensitive nerve in the financial system. In the last round, even mild reserve declines caused bond market turmoil, forcing the Fed to expand again. For Warsh to push through balance sheet reduction, he must not only convince the FOMC but also prove to the market that there won’t be another accident.

He said a candid truth at his confirmation hearing: "It took us 18 years to build such a large balance sheet, we can't fix it in 18 minutes."

The third challenge comes from within the Fed: currently, the FOMC is unusually divided, so the new Chair cannot pivot unilaterally.

The late-April FOMC meeting kept rates unchanged, but the pattern of dissent hit a rare record since 1992: Hammack, Kashkari, Logan opposed keeping language implying "possible future rate cuts," while another vote called for immediate rate cuts. There were simultaneous but opposite directions of dissent—some think it’s too dovish, some too hawkish, and no one is satisfied with the current stance.

The meeting minutes' language is more hawkish. The inflation description changed from "somewhat elevated" to "elevated." In Fed lingo, this isn't wordplay; it's a clear signal of lower tolerance.

Former Philadelphia Fed Chair Patrick Harker was straightforward: "There's no way they're cutting rates this year—how could they?"

Another detail can’t be overlooked: Though Powell stepped down as Chair, his Governor term runs until January 2028. The former Chair will remain on the committee, becoming a permanent vote—and presence—whenever the new Chair tries to push any agenda.

This is the starting paradox of the "Warsh era": He rose on rate-cut expectations, yet takes power in an environment where rate cuts are increasingly difficult.

The Toughest Question: Independence

The root of Trump's rift with Powell was the latter's refusal to cut rates as demanded. Trump labeled Powell "Too Late," called him "jerk," and blatantly suggested the Fed should reduce its independence and coordinate with the fiscal agenda. Warsh was selected in this context.

This brings an unavoidable question: Will the market believe Warsh makes decisions based on data, or based on the White House’s preferences?

For investors, the answer to this question is more important than the rate cut itself.

If the market thinks Warsh’s rate cut is "political," the discounted independence of the Fed will be reflected directly in the bond market pricing. That cost will be borne by everyone—including the White House itself.

Citi economist Andrew Hollenhorst offered a relatively mild path: Warsh won’t cut rates in June, but as core inflation cools and unemployment rises, cuts may resume in September. This path requires two conditions: cooling services inflation and a softer labor market. Missing either, a rate cut is no longer "data driven," but a politically hard-to-justify move.

The Caitong Securities fixed income team had a saying worth reflecting on: "Although Warsh isn’t a dovish Chair, it’s not certain there won’t be a cut this year—the relationship between the Fed Chair and the US President isn’t static, but changes with circumstances."

The core of this statement is not to label Warsh, but to remind the market: Chair preferences, White House pressure, inflation data, and FOMC consensus will be in constant tug-of-war in the coming months, and no single side can decide the outcome alone.

The First Battle Is Not Rate Cuts, But Proving Himself

The "Warsh era" has come, but it’s not an era that starts lightly.

Tonight’s oath ceremony is just a formal handover. The real test of power will unfold at the next FOMC meeting, the next set of inflation data, and the market’s repricing of Fed independence.

The core contradiction Warsh faces has never been "is he dovish or not." The more accurate question is: Can a person picked by Trump to cut rates wait for supportive data without sacrificing the Fed's credibility?

If the data doesn’t support him, the more eager he is to meet White House expectations, the greater the discount to Fed independence; if he insists on waiting, both Trump and the bond market will keep up the pressure.

Warsh’s first battle is not to cut rates, but to prove he is not Powell’s opposite—not a Chair who traded obedience for position but lost credibility at the critical moment.

This path is far more difficult than cutting rates.

Risk Disclaimer and Disclaimer ClauseThe market has risks, investment needs caution. This article does not constitute personal investment advice and does not take into account the individual investment objectives, financial situation, or needs of specific users. Users should consider whether any opinions, views, or conclusions in this article suit their particular circumstances. Please invest accordingly at your own risk. ```