Key Points
- Donald Trump’s handpicked successor to Fed Chair Jerome Powell, Kevin Warsh, was officially sworn in on May 22.
- Although the Federal Reserve operates independently, President Trump has repeatedly urged the Federal Open Market Committee to lower interest rates.
- A significant energy supply shock stemming from the Iran conflict has pushed U.S. inflation to a three-year high, presenting a major challenge for the new Fed chair.
In recent weeks, Wall Street has been witnessing historic gains across major indices, including the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite. Amid this backdrop, the Federal Reserve has become a focal point for investors as the newly appointed chair, Kevin Warsh, confronts two major tests in his first 100 days.
Kevin Warsh was officially sworn in as Fed chair on May 22. Image source: Official White House Photo by Daniel Torok.
Kevin Warsh previously served on the Board of Governors and was a voting member of the Federal Open Market Committee (FOMC) from February 24, 2006, to March 31, 2011. The FOMC, composed of 12 members, is responsible for setting U.S. monetary policy.
Despite his experience, Warsh confronts two significant challenges: meeting the President’s demand for lower interest rates and managing high inflation.
President Trump’s Pressure for Lower Rates
While the Fed is an independent entity, President Trump has consistently advocated for aggressive rate cuts. During his tenure as chair, Powell had lowered the federal funds target rate six times between September 2024 and December 2025, but the current target range of 3.5% to 3.75% remains above the President’s desired level.
Trump’s push for lower rates is motivated by several potential benefits:
- Lower borrowing costs could stimulate corporate hiring and innovation.
- Reduced Treasury bond yields would, in turn, lower mortgage rates and improve housing affordability.
- Cheaper borrowing would ease the servicing of the U.S. government’s outstanding debt.
Target Federal Funds Rate Upper Limit data by YCharts.
Image source: Getty Images.
Inflation on the Rise
Inflationary pressures are steering Warsh in the opposite direction. While tariff-induced price increases contribute modestly, the primary driver is the energy supply shock caused by the Iran conflict. Following the U.S. offensive on February 28, Iran shut down the Strait of Hormuz, halting about 20% of global oil demand. This disruption has pushed crude oil and fuel prices higher, reflected in recent inflation data.
US inflation is red hot.
1. CPI Inflation: 3.8%, highest since May 2023
2. PCE Inflation: 3.8%, highest since May 2023
3. PPI Inflation: 6%, highest since March 2023
4. Services Inflation: 3.4%, highest since Sept 2025
5. Shelter Inflation: 3.3%, highest since Sept 2025
Trailing 12-month inflation climbed from 2.4% in February to 3.8% in April, with May projected at 4.18% according to the Federal Reserve Bank of Cleveland’s Inflation Nowcasting tool. The lagging impact of energy price shocks suggests further upward pressure on inflation.
Balancing Act: Warsh’s Two Major Tests
In his first 100 days, Warsh faces the dual challenge of addressing President Trump’s rate-cut demands while curbing inflation. Historical precedent indicates Warsh is inclined to prioritize price stability. His prior FOMC record, during which he often warned against lowering rates, aligns with this hawkish stance.
“If Trump wants someone easy on inflation, he got the wrong guy in Kevin Warsh.” @AnnaEconomist
Should the Fed opt to tackle Iran war-driven inflation aggressively, it risks alienating President Trump and potentially unsettling the market’s bullish trajectory. Conversely, yielding to rate-cut pressure could undermine the Fed’s credibility amid escalating inflation.
Ultimately, Warsh is likely to face a scenario where he must prioritize one objective over the other, with significant implications for monetary policy and market sentiment.
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