Ahead of Senate Banking Committee hearings for Kevin Warsh to take the helm of the Federal Reserve, interest rate policy has grabbed headlines.
President Donald Trump nominated Warsh with the assumption that the former Fed governor would be more likely to cut rates than outgoing chair Jerome Powell has been. Trump has repeatedly said borrowing costs should be much lower than they are now.
But many of the president’s own policies, from taxes to tariffs to the war in the Middle East, have driven inflation higher — so much so that the Fed’s next step could just as easily be hiking rates as cutting them.
Meanwhile, many analysts believe the economy has changed so much that the steps the Fed has taken in the past may no longer be relevant. Moving rates up or down might well be the least of Warsh’s concerns if he becomes chair.
Here’s what to know about what a Warsh-led central bank might face — and what it might do.
Inflation May Reignite
Inflation fell throughout the late 20th century as the world globalized, said Steve Blitz, chief U.S. economist at GlobalData. But now, countries are pulling back and moving inward, with most developed economies, including the United States, wanting to produce goods domestically, not abroad.
In fact, the Trump administration is content with a slightly weaker dollar, which helps make U.S. producers more competitive with global counterparts and to try to bring manufacturing back to the United States. The administration’s immigration policies have helped shrink the workforce, making labor more expensive, and tariffs have raised input costs.
All together, this lends an inflationary bias to the economy, Blitz told USA TODAY in an interview.
Nicholas Colas, co-founder of DataTrek Research, made the same point in an April 14 research note. The long and slow recovery from the 2008 financial crisis and Great Recession made the 2010s an extended period of tepid growth that allowed the Fed to keep rates low, he wrote.
“The 2020s have been an entirely different story. Near term inflation has been above the Fed’s target (2%) for much of the decade and remains so to this day.”
Unless there is a recession, Colas concluded, “U.S. interest rates will likely be higher than many market participants expect for the rest of the decade.”
No More Punch Bowl?
Setting interest rates is only one of the ways the Fed can influence the economy. During some crises, like the 2008 financial meltdown and at the height of the pandemic in 2020, the central bank has used its balance sheet to buy bonds. Its holdings have skyrocketed and now stand over $6 trillion.
Acting quickly and decisively to buy bonds in an emergency is much easier than reversing that process once the crisis is over, observed Don Rissmiller, chief economist at Strategas, in a research note.
Financial markets don’t like the Fed to withdraw its support, which is often jokingly referred to as a “punch bowl.” Sometimes the safety and soundness of the banking system comes into question, he said.
As a result, the Fed might aim to keep a much smaller balance sheet and adopt a policy of being more careful with bond-buying programs to begin with, he said, “reserving such a tool for major crises.”
No More Mission Creep
In a 2025 speech, Warsh criticized the Fed for what he called “institutional drift.”
“The Fed has assumed a more expansive role inside our government on all matters of economic policy,” he said, “and moved into matters of statecraft and soulcraft, too. In my view, forays far afield — for all seasons and all reasons — have led to systematic errors in the conduct of macroeconomic policy. The Fed has acted more as a general-purpose agency of government than a narrow central bank.”
Beth Ann Bovino, chief economist for U.S. Bank, believes that some of the efforts that the Powell Fed made over the past few years have run their course. One example might be an attempt to reevaluate metrics of unemployment to make them more inclusive, which may have simply confused market participants.
“I think they’ve learned from their mistake,” she told USA TODAY.
Importantly, Bovino thinks that the Fed’s instinct in the near term is to stay on the sidelines of policy moves and to move forward when it has consensus. Having a unified committee is important for the chair’s credibility, she said.
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