Waller's Difficult Start: Rate Cuts Extremely Challenging, Balance Sheet Reduction Time-Consuming, Communication Reforms Face Strong Resistance

After the Senate Banking Committee vote, Kevin Warsh has almost secured the next Fed chairmanship and may make it in time for the June FOMC meeting. But according to JPMorgan's assessment, Warsh may not quickly lead the Fed toward rate cuts, and the balance sheet reduction path will also be slow and lengthy.

According to Chase Traders, Michael Feroli, JPMorgan North America economic research analyst, noted in his latest report that the Fed system will constrain Warsh, especially regarding the near-term direction of the federal funds rate. In the short term, it's difficult for the FOMC to cut rates.

Warsh may propose several arguments to push for more accommodative policy—AI improving supply capacity, switching to trimmed mean inflation indicators, downplaying forward guidance, shrinking the balance sheet. The areas most likely to gain solid discussion space are the balance sheet and communication method; the policy rate is the hardest to move, especially as the FOMC’s patience toward high inflation is waning, and three members have recently leaned toward more hawkish guidance.

The report points out that rates must pass FOMC, balance sheet reductions must first resolve reserve demand, and press conferences, seemingly controlled by the chair, may actually weaken the chair's narrative ability. In other words, after Warsh takes over, the Fed in the short term will look more like a Fed held back by institutional constraints, inflation data, and internal consensus.

Rate cuts can't be done just by changing the chair

Warsh's policy label is not stable. The report mentions that he was quite hawkish when he served as a Fed governor after the financial crisis, but lately has expressed more dovish views on monetary policy, and this shift, coincidentally or not, is closer to Trump's position.

Even starting from "dovish Warsh," it’s hard for him to convince the FOMC to quickly cut rates. The reason is direct: The committee’s patience for stubbornly high inflation is wearing thin, and three recent dissenters all point toward more hawkish forward guidance; the FOMC’s only reliable dove recently, Stephen Miran, is leaving, and the vacant seat is the one Warsh will take.

This means Warsh doesn’t get an extra vote upon taking the chair, but must attempt to drive a directional change in a committee that is not eager for easing.

JPMorgan also believes that if Warsh can’t convince the FOMC, he is very unlikely to cast a dissenting vote in his own presided committee. That would be seen by contemporaries and historians as a sign of a failed chairmanship. Warsh has supported more dissent in the past, but once he becomes chair, he may reinterpret the value of “collaboration.”

AI is unlikely to be a reason for immediate rate cuts

One important reason for Warsh’s dovish tilt is that AI may boost America’s supply-side capability, thereby reducing inflation pressure and allowing lower rates, but the FOMC internally is also unlikely to buy this argument.

The report references Powell's logic from the March press conference: In the short term, generative AI doesn’t directly expand potential output but, instead, leads to the construction of data centers everywhere; this increases demand for various goods and services, and, on the margin, may actually push up inflation and raise the neutral rate in the short run. In the long run, if AI really raises productivity, it could certainly expand potential output, but the key question remains whether demand grows faster than supply. That answer cannot be determined in advance.

This is unfavorable for Warsh. Because if he uses AI as justification for rate cuts, he’ll have to confront not just market narrative, but the FOMC and its members’ skepticism about “when will supply shocks materialize.” The report judges that Powell's view likely reflects the position of Fed staff and most members.

Switching inflation metrics may not bring rate cuts either

Warsh has also proposed another path to lower rates: re-examining how inflation is measured.

The FOMC’s official target is 2% PCE inflation, but core PCE has long been treated as an intermediate observation indicator. Warsh thinks trimmed mean inflation could be a better target. This proposal seems "useful" at present: Dallas Fed’s trimmed mean inflation is currently 2.33%, 64 basis points lower than core PCE.

But that metric does not always serve dovish arguments. Just earlier in 2024, the trimmed mean inflation was higher than core inflation. In other words, if Warsh uses current readings as basis for rate cuts, it’s easy to be countered: When this indicator is higher, should a more hawkish conclusion also be accepted?

The report adds that talking about a "new inflation framework" before the Senate Banking Committee is quite different from convincing those inside the FOMC who actually research these issues. Chicago Fed president Goolsbee has published peer-reviewed papers on inflation measurement. For Warsh to promote this path, more specific argumentation is needed, not just talk of better measurement or observing many prices.

Balance sheet reduction easier to discuss, but not the main storyline for 2026

Compared to rates, the balance sheet is an area where Warsh is more likely to get response from members.

Warsh prefers to use rates rather than the balance sheet to adjust the macroeconomy. There is little dispute within the FOMC on this point. Most Fed officials already see balance sheet policy as a substitute when short-term rates approach zero, not as a tool of choice in normal times.

Warsh also wants to see a smaller Fed balance sheet, believing its current economic “imprint” is too large. The report suggests many committee members may be willing to re-examine this issue.

The real constraint is technical: To reduce the balance sheet without triggering reserve shortages requires lowering banks’ demand for reserves. The Fed does have several options, but almost all require research and debate, lasting at least several months. Therefore, this is unlikely to be the main policy issue in 2026 or even 2027.

This is another clear distinction in the report: There may be consensus on the direction of balance sheet reduction, but the process will be much slower.

Less frequent press conferences may actually weaken the chair

Warsh has repeatedly discussed Fed communication issues, especially hoping to reduce forward guidance. His concern is that forward guidance could prematurely lock in policymakers’ future choices.

The FOMC may be willing to revisit communication methods, but it’s hard to form a simple conclusion. Just last year, the Fed conducted a thorough review of its communication system in tandem with a framework review. Powell this week said the committee couldn’t find a broadly supported plan, so will just continue forward. If the dot plot or economic summary is to be modified, it will likely require a committee vote; and many members may want to keep the dot plot because it lets everyone have a voice in overall communications.

The press conference is different; it is more in the chair’s domain. Outsiders thus speculate whether Warsh would cancel press conferences, reduce frequency, or restrict media questions, but the report thinks he will ultimately maintain the status quo.

The reason is practical: Press conferences let the chair be the first to define the policy narrative. If Warsh weakens this venue, other Fed officials’ statements would fill the vacuum, and the chair’s narrative control could fall.

The June FOMC will be Warsh's first test. If he personally opposes maintaining the policy but must speak for the committee, press conferences become tricky. In the Bernanke, Yellen, and Powell eras, the market believed the chair faithfully passed on the committee consensus; if Warsh's remarks are seen as injected with personal preference, the market may be more confused, and the press conference's authority itself could be undermined.

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