President Trump is giving Warsh leeway to restructure the Fed

When Kevin Warsh takes to the podium Wednesday for his first news conference as Federal Reserve chairman, he will enjoy something his predecessor, Jerome Powell, has long lacked: presidential leeway.

“The president has confidence in Mr. Warsh, so there will be some scope for action,” a source familiar with the power relationship between Trump and the Fed said on condition of anonymity, describing the relationship as one of the most volatile in the current administration.

The new Fed chairman will try to use that freedom to advocate internally for broader changes at the Fed, according to people who know him and follow the Fed closely. Mr. Warsh’s reform agenda includes slowly moving the Fed toward the low interest rates that Mr. Warsh championed, as well as shrinking the Fed’s multibillion-dollar balance sheet and changing the way it thinks about inflation. Achieving that will require careful use of the extensive but not unlimited political capital that comes with his new position.

Warsh’s appointment comes as the U.S. economy is showing resilience and a tentative deal to end the war with Iran could ease inflation concerns. While Warsh is unlikely to deliver the immediate interest rate cuts demanded by President Donald Trump, the new chairman is already being given a break from the president, who took unprecedented steps to weaken the Fed under Powell.

Mr. Powell repeatedly said that he and the Federal Open Market Committee determine interest rates based solely on economic factors, but Mr. Trump believed that was not the case. He has seen politics everywhere.

Markets overwhelmingly expect Mr. Warsh to announce this week that the Fed will keep interest rates on hold, as Mr. Powell has done since December. President Trump will not see this as a betrayal, the person said. “I think there’s a lot of value in having the president’s trust, because he thinks you’re acting out of your best judgment and not out of vendetta against him,” the person said.

President Trump has said in recent days that he wants Warsh to “do whatever he wants” and “be completely independent.” The Federal Reserve is independent by statute and reports to Congress, not the president.

Warsh said during his confirmation hearing in April that he was open to hearing from the president and others about interest rates, but that the final decision would be up to the Fed. “Humble central bankers should listen and make their own decisions,” Warsh said.

The White House did not respond to requests for comment on the relationship between Trump and Warsh. The Fed declined to comment on Mr. Warsh’s plans for the meeting or his relationship with the president.

How long this relationship will last is the subject of intense speculation in Washington. Trump has a long history of antagonizing political allies.

Mr. Warsh urgently needs to shore up support among the 12 voters on the rotating Federal Open Market Committee, which is made up of the New York Fed president, four other regional Fed presidents and seven permanent members of the Fed’s board of directors.

“The chairman has a lot of leeway,” said Johns Hopkins University economist John Faust, a longtime adviser to Mr. Powell. “However, any chairperson who chooses to go too far in either direction is likely to run into trouble with the board or committee, as appropriate.”

Stephen Millan, one of the Fed’s most vocal proponents of rate cuts, resigned from the board to replace Warsh. Another supporter of rate cuts, Governor Christopher Waller, said in May that if inflation did not subside, rates might need to be raised instead.

The Fed is officially committed to keeping a certain level of inflation, known as core personal consumption spending, below 2%. At the latest reading, the core PCE was 3.3%.

Energy prices have skyrocketed due to the Iran war, and gasoline prices in the United States have also increased. That has led some Fed members, including Dallas Fed President Laurie Logan and Cleveland Fed President Beth Hammack, to say they may need to raise rates this year.

If ship navigation in the Strait of Hormuz resumes, as envisioned in the U.S.-Iran framework announced on Sunday, Warsh will be on a better footing to press his long-standing claim that artificial intelligence is helping economic growth without exacerbating inflation.

Neither the war nor President Trump’s tariffs have completely thrown the U.S. economy out of balance. According to Labor Department data for May, 172,000 jobs were created and the unemployment rate remained stable at 4.3%.

Traders have gone from predicting a rate cut in January, when Warsh was appointed, to predicting at least one rate hike this year, according to CME FedWatch.

Mr. Warsh has an opportunity to reconfigure how the Fed responds to these market expectations.

The Fed’s main policy statement, updated at each FOMC meeting, now includes what is known as an “accommodation bias,” meaning the Fed is looking for opportunities to cut rates further. At Chairman Powell’s last meeting in April, three Fed board members opposed the move and called for an end to bias.

“My strong feeling is that the ruling will be changed and all three objections will be resolved,” said Mickey Levy, a visiting scholar at the Hoover Institution and a longtime former colleague of Mr. Warsh.

Mr. Warsh will bring the Fed new ties to the opposition. The three-person opposition party in April was particularly impressive, as Mr. Powell worked with voters to build a consensus ahead of the meeting, but there was little opposition.

“Kevin would never do that,” Levy said. “He’s not going to care about dissent and he’s not going to manage it.”

Mr. Warsh calls his preferred approach “family warfare,” or robust debate within the Fed. “I like clean notes and messy meetings,” Warsh said during his confirmation hearing in April.

He has criticized the Fed’s practice of recording and transcribing the entire two-day FOMC meeting, which he believes stifles disagreement.

Former Minneapolis Fed President Gary Stern was present at the FOMC in the 1990s when Chairman Alan Greenspan revealed that the Fed was recording its meetings. “It affected the nature of the discussion and conversation, but not in a positive way,” Stern told CNBC.

But Warsh would need to spend political capital to make immediate changes to how the conference is run, which he may instead reserve for other priorities.

“He would make such calculations in all directions,” Faust said.

The Powell type of senior staff will remain the same. Mr. Warsh has hired two Fed outsiders as interim policy advisers, but has not made any other major personnel changes.

Mr. Warsh also inherited from Mr. Powell an informal decision-making arrangement known as the Troika, an informal group of the Fed chair, vice chair, and New York Fed president. Philip Jefferson has been vice chairman since 2023, and John Williams has led the New York Fed since 2018.

“The troika is the main forum for policy direction,” Faust said. Mr. Warsh may informally elevate another group of advisers, but the vice chair and New York Fed president have unique powers that make them a useful place to start building consensus, he said.

CNBC has learned that Mr. Warsh has been secretly lobbying for Mr. Williams to retire early and have a replacement in place for the past two years. There is no indication that Mr. Warsh is involved in the effort. Williams will retire as Fed president in June 2028 at the age of 65.

The Washington-based Fed board is heavily involved in selecting regional Fed presidents, including New York, and will need a vote to approve the final selection.

Faust said bringing about change in the troika is where Warsh needs the most political capital.

The New York Fed declined to comment.

Mark Spindel, founder and chief investment officer of Potomac River Capital and a Federal Reserve historian, said another obstacle facing Mr. Warsh will be the market. “Who’s the eighth governor in this room? The bond market.”

Warsh has said he is not impressed with Core PCE and wants to change the way the Fed measures inflation. However, he hasn’t said much about what exactly he wants to replace it with. It may be by design. Going too far in trying to change something as important as the Fed’s main inflation policy too quickly could lead to a revolt among voters and staff.

Spindel said the uncertainty about the path forward will impact the market.

“As a bond trader or bond investor, you would want a little bit more yield given the fact that you don’t know what this person is doing,” he said.

Some, but not all, of these answers will be published on Wednesday. That might be enough for Warsh.

Spindel said Warsh could “buy time” at Wednesday’s meeting by raising potential points of agreement, such as keeping interest rates on hold and eliminating the Fed’s easing bias, and presenting them as a product of his leadership style and the FOMC’s careful deliberations. Spindell said this would allow Warsh to tackle more difficult issues, such as combating inflation, “without compromising credibility and certainly pleasing people in the Oval Office.”