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Kevin Warsh appears to be taking seriously the traditional role of a central banker: withdrawing monetary support when economic conditions begin to overheat. Four months into his tenure as chair of the US Federal Reserve, he has won some initial approval from investors.
The Federal Open Market Committee last week raised the federal funds rate by 0.25 percentage points. Bond yields moved higher, while the stock market recovered after an initial sell-off.
According to the author, Christopher Smart, managing partner of the Arbroath Group and a former senior economic policy adviser in the Obama administration, the decision came despite widespread public pessimism. A recent YouGov poll found that only 28% of Americans believed the country was moving in the right direction.
Inflation pressures and political scrutiny
The S&P 500 has gained 13% so far this year, but several pressures continue to weigh on the US economy. Wars in Ukraine and the Gulf have pushed gasoline and diesel prices higher, while electricity costs have risen amid large-scale data-centre construction linked to artificial intelligence.
The US government has also imposed tariffs on imports and has shown little sign of curbing spending, even as borrowing costs approach their highest level since 2007.
Warsh did not identify any of those factors directly when explaining the rate decision. Instead, he said the committee had “removed a dose of accommodation”. His long-standing opposition to extensive forward guidance may have influenced his cautious language, while also allowing him to avoid appearing to blame President Donald Trump for inflation.
The decision followed months of political pressure on the Federal Reserve. Trump repeatedly criticised Warsh’s predecessor, Jerome Powell, for not cutting interest rates. His administration also pursued an investigation into cost overruns related to renovations at the Fed’s headquarters and sought to remove Fed Governor Lisa Cook.
Warsh seeks to distance the Fed from politics
Before his appointment, Warsh had adopted views that appeared more supportive of lower interest rates, arguing that artificial intelligence could eventually raise productivity and ease price pressures. During his confirmation hearings, Senator Elizabeth Warren accused him of being the president’s “sock puppet”.
Warsh has also argued that excessive forward guidance can distract markets from economic fundamentals, as investors focus on predicting the Fed’s next move. His first news conference as chair was widely criticised after he declined to discuss the likely sources of inflation, contributing to a bond sell-off.
A more hawkish speech at the Federal Reserve’s conference in Jackson Hole in August appears to have helped secure unanimous backing from the FOMC. Warsh pointed to multiple inflation components running above 3%, noting that the Fed had failed to meet its 2% inflation target for more than five years.
Trump responded on social media by calling for US interest rates to be set at 1% or lower, saying the country was “booming with new investment”. Investors have largely become accustomed to the president’s criticism of monetary policy, but welcomed the fact that he did not personally attack Warsh. Senior Republicans also refrained from criticising the decision ahead of difficult midterm elections.
Further challenges for the Federal Reserve
The rate increase has so far helped stabilise market-based inflation expectations and provided an early boost to the Fed’s credibility. However, the central bank faces further challenges as it responds to commodity price increases, the uncertain economic impact of artificial intelligence and continued high government borrowing.
Warsh grouped those risks under the phrase “the geopolitical landscape of shocks and uncertainty”. While individual shocks linked to oil, tariffs or borrowing costs can be absorbed as consumers, businesses and investors adjust, the continuing arrival of new shocks presents a more serious challenge.
The views expressed in this article are those of the author and do not necessarily reflect the editorial policy of Anadolu.
