‘thoughts And Prayers’: The Minefield That Awaits Kevin Warsh At The Fed

Federal Reserve Chair Jerome Powell will keep interest rates steady on Wednesday as he struggles to parse a bewildering mix of data: rising energy prices, an uncertain labor market and questions over shifting tariff rates.

Soon, it will all be Kevin Warsh’s problem.

Powell will preside over what is likely his last rate decision as Fed chief as the war in the Middle East enters its third month with no end in sight. Oil has been driven above $100 a barrel for much of that time, derailing central bankers’ hopes that they could both lower borrowing costs and keep up their fight to get inflation back to 2 percent.

And that’s not the only predicament Warsh will inherit if he is confirmed by the Senate as Powell’s successor next month. He’ll take over a central bank that has been beset by political battles with President Donald Trump, who has relentlessly pressed for lower interest rates and threatened to fire Powell and another Fed governor for cause — a power that the Supreme Court will soon weigh in on.

Against that backdrop, the Fed faces crucial dilemmas on everything from the war’s economic fallout to the potential tectonic effect that artificial intelligence will have on jobs. And Warsh — a Trump nominee who faces a close confirmation vote Wednesday by the Senate Banking Committee — is poised to be the one who will have to see them through.

“Right now, you’ve got different signposts pointing in 18 different directions, and you have to decide how they will interact with each other,” said Martha Gimbel, the executive director of Yale’s Budget Lab. “Thoughts and prayers to them all.”

While Powell and his fellow Fed officials have held off on policy changes this year as they assess the outlook for prices and jobs, Warsh will take the job with a clear mandate from Trump to lower borrowing costs. Yet the optimal rate path isn’t obvious as the administration aims to keep the economy on an even keel heading into the midterm elections later this year.

For now, it’s not certain that rate cuts are urgently needed. Job growth has been nearly nonexistent over the past year — a circumstance that normally would call for more immediate action to stimulate growth. But Trump’s immigration crackdown and the U.S.’ slowing population growth mean that low hiring hasn’t translated to a significantly higher unemployment rate. And consumers are still spending at a healthy clip, even as they stress about the cost of living.

The likely new Fed chair has argued that productivity gains from artificial intelligence, rather than the prospect of a weakening economy, will help build the case for rate cuts because it will allow for faster growth without higher prices. But many of his colleagues seem less convinced.

Maurice Obstfeld, a former chief economist at the International Monetary Fund, now at the Peterson Institute for International Economics, said it was “really premature” to talk about AI as a basis for rate cuts.

In the meantime, uncertainty about the extent to which high energy prices will slow growth and spur inflation raises the same kind of complex questions that the Fed has already been grappling with around tariffs; the central bank isn’t designed to fight both those problems simultaneously.

On the bright side for Warsh, Fed policymakers have generally been inclined to envision rate cuts at some point this year, which might help him get at least one reduction early in his tenure.

But that kind of move is by no means guaranteed. Central bankers have also grown increasingly open to the idea that oil price spikes could eventually lead to a scenario where they need to raise rates.

Nathan Sheets, global chief economist at Citigroup, said that typically the Fed believes it does not need to react immediately to energy shocks because the effects might not last. That approach worked well in the wake of the 2008 financial crisis, when the cratering global economy ultimately brought down then-soaring oil prices on its own.

But more recently, the central bank waited too long to begin hiking rates after a different supply shock — the Covid pandemic — because officials thought those price spikes would be temporary, he added.

“There is this tension between not repeating the mistakes of 2021 versus the Fed’s traditional playbook,” Sheets told reporters.

Even if Warsh can convince his fellow officials to lower rates, there are political risks for Trump. While the president has made it abundantly clear that he wants rates to come down to help boost growth, if that sparks higher inflation, it could also hurt Republicans at the polls later this year — a lesson the Democrats learned in 2024.

In the 1970s, President Richard Nixon leaned on then-Fed Chair Arthur Burns to keep interest rates low, an episode that ultimately fueled inflation and forced even higher rates years later.

Powell, who has faced enormous pressure from Trump to dramatically reduce rates in both the president’s first and second terms, knows that history well.

When walking around with others at the Fed, the central bank chief often stops at the portrait of Burns to acknowledge that he sees it as a cautionary tale, according to two people familiar with the comments.

Now, Warsh might face that same threat as he prepares to take the reins of the institution.

“The lesson of the last couple years is the Federal Reserve attempting to foster maximum employment and stable prices isn’t made up by the Federal Reserve,” said Vincent Reinhart, chief economist at BNY Investments and a former senior Fed staffer. “People actually do care about inflation. And in an environment in which people care about inflation, they vote that way too.”

Sam Sutton and Daniel Lippman contributed to this report.