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Kevin Warsh’s nomination to succeed Jerome Powell as US Federal Reserve chair has triggered a predictable frenzy of speculation centered on a single, narrow question: How hard will he push for interest-rate cuts? While such conjecture may be entertaining, it misses the forest for the trees. To focus solely on rate cuts is to misunderstand the Fed’s situation and the scale of the challenge awaiting its next leader.
Warsh inherits an institution that, by any historical measure, is deeply fractured internally and lacks credibility externally. One need not look far for evidence. The minutes of the most recent policy meeting read like a thesaurus, with a long list of qualifiers – “a few,” “some,” “several,” “a number,” “many,” and “the vast majority” – signaling an unusually wide dispersion of views within the policy-setting Federal Open Market Committee.
This internal friction reflects a complex economic landscape, in which both components of the Fed’s “dual mandate” – price stability and maximum employment – are under pressure, and FOMC members harbor differing sensitivities to them. It also reflects a certain defensiveness, triggered by US President Donald Trump’s attacks on the Fed, which have escalated during his second term.
Moreover, Fed policymakers are aware of enduring criticism over their handling of the 2021 inflation surge: by treating it as “transitory” for too long, they inadvertently contributed to the current affordability crisis. The Fed has lately been receiving some of its lowest-ever scores on trust surveys.
Under these conditions, any incoming Fed chair would need time to establish their authority, build consensus, and restore the institution’s credibility and standing. Having previously served on the Fed’s Board of Governors, Warsh is too seasoned and too savvy to try to push the FOMC into politically motivated rate cuts. But even if he did desire cuts, he could not force the committee’s hand, owing to its structure: the Fed chair is “first among equals” in the FOMC, lacking a formal veto. And there is little reason to think the FOMC would rubber-stamp inappropriate rate cuts.
Warsh might be able to persuade his colleagues to adopt a more accommodative forward-looking posture, such as by highlighting labor-market risks and the promise of an AI-driven productivity surge, which could increase the economy’s non-inflationary “speed limit.” But whether or not he does would answer just one of the key questions about his leadership. Ultimately, the success of the “Warsh Fed” will be measured not by the Fed funds rate alone, but by whether it includes an overhaul of outdated operational machinery and strengthens the underpinnings of balance-sheet policy.
The Fed has made repeated analytical and forecasting errors in recent years, as well as supervisory lapses and monetary-policy slippages. Its excessive data dependency is one reason why: such a posture is fundamentally reactive, making it incompatible with the forward-looking strategic vision needed to devise policies that act with a lag.
Improving the Fed’s record and restoring trust in its judgment will require Warsh to address a long list of problems. The FOMC’s structure and process make it susceptible to groupthink, and the institution has experienced mission creep. Its communication, especially at the press conference that follows each policy meeting, has often generated confusion, rather than offering the clarity that effective “forward policy guidance” demands. It is insufficiently accountable to the public. And its analytical models need a revamp. It does not help that several top policymakers have resigned over unproven allegations of financial irregularities.
Warsh has been vocal about many of these issues, including in his G30 Spring Lecture last April. Now, he must tackle them head-on. The extent to which he succeeds will determine not only the Fed’s future policy effectiveness but also the Fed’s political independence, at a time when the US economy is caught between the upside of innovation and the legacy of high debt, deficits, and inequality.
Another pillar of the Warsh agenda must be the Fed’s balance sheet. Since the 2008 global financial crisis, the Fed has sharply expanded its market footprint, from roughly $1 trillion before the crisis to $9 trillion at its peak in 2022. This has contributed to surging wealth inequality and led to concerns – which Warsh and I share – about the central bank’s interference in markets and the resulting inefficiencies in the allocation of resources throughout the economy.
This is not to say that Warsh should merely shrink the Fed’s ledger. Rather, the Fed must establish a “balance-sheet theory.” Just as economists debate the “neutral” interest rate (r*), the Fed needs a clearer framework for what constitutes a neutral or equilibrium level of market intervention via its balance-sheet operations.
I suspect the internal response to Warsh’s leadership will mirror the reception of his G30 Spring Lecture. After he finished, G30 Chair Raghuram G. Rajan – a professor at the University of Chicago who has been International Monetary Fund chief economist and governor of India’s central bank – commented that he “pretty much” agreed with everything Warsh said. If Warsh can win over Fed staff and management with similar effectiveness, the Warsh era may well deliver long-delayed reforms and a return to institutional excellence.
