The Fed's New Sheriff Rides Into a Burning Town

Kevin Warsh was sworn in as the 17th chair of the Federal Reserve just three weeks ago in a ceremony that took place in the White House.1 Now, this week, he sits down for his first meeting of the Federal Open Market Committee, inheriting a central bank reporting an inflation reading at a 3-year high, steady at 3.50 to 3.75 per cent, and a president with very public views on what the future holds.

Warsh came into Washington with an idea, campaigning on what some on Wall Street called a monetary barbell: shrink the Federal Reserve's overly bloated balance sheet, and quantitative tightening would create room for short-term rate cuts without ballooning inflation.2

Quantitative tightening (QT): The process by which a central bank reduces the size of its balance sheet — typically by allowing bonds it holds to mature without reinvesting the proceeds. It is the reverse of quantitative easing, and is intended to drain liquidity from the financial system and put upward pressure on longer-term interest rates.

His confirmation as chair was sealed 54 votes to 45, the closest any Fed chair has come to being rejected in the last decade. It was a near-perfect party split, Republicans voted for, Democrats against, with one outlier. Pennsylvania's John Fetterman, the most unconventional member of the Democrat party, was the only one to cross the aisle and vote yes.3 He now faces a paradox that has led to the undoing of several of his predecessors: the man appointed to cut rates may end up being the man who needs to raise them.

The Numbers Don't Lie

The data released in the past week solidified the paradox that Warsh faces. The Consumer Price Index rose 4.2 per cent in May on an annual basis, driven by a 23.5 per cent surge in energy costs, which contributed more than 60 per cent of the month's overall increase.4 The Producer Price Index foreshadowed this in April, coming in at 6.0 per cent year-on-year, the highest reading since December 2022, and almost triple what analysts forecasted on a monthly basis.5 Core inflation, which excludes food and energy, was at 2.9 per cent. The significance of this number is that it signals the pressure is not simply an oil shock: tariff costs introduced by the Trump administration a year ago are beginning to bleed into broader goods and services prices.

Key figures: US CPI May 2026: 4.2% · Energy CPI: +23.5% · Core CPI: 2.9% · PPI April 2026: 6.0% · Fed funds rate: 3.50–3.75% · Fed 2% inflation target

The Fed will not move this week. Markets currently price a 97 per cent probability of no change.6 But the more revealing number is what traders are predicting: not a cut, which was the universal expectation at the start of the year, but a hike. The jobs market removed any argument for easing growth. Employers added 172,000 new positions in May, more than expected, with the figures for earlier months revised higher too. With hiring still solid, the Fed has no economic emergency to point to as a reason for cutting rates.7 Warsh is left with a demand-side tool to tackle a supply-side problem; rate hikes cannot reopen a blocked strait or unwind a tariff schedule. What they can do is slow down an already fragile economy and increase unemployment, which is why the Federal Open Market Committee finds itself watching inflation rise, knowing its primary tool is the wrong one.

There is another subplot worth noting that took place before Warsh's confirmation. Warsh told lawmakers that he would prefer to track inflation using trimmed-mean averages, a measure that strips out extreme outliers at both ends of the price distribution and tends to show lower readings than the traditional CPI or the Fed's preferred Personal Consumption Expenditures index.8 Critics, including economists at Bank of America, warned against switching metrics mid-crisis, suggesting it looks like they're moving the goalposts and leaving institutional risk as a real threat. The Federal Reserve's credibility relies on consistency, and consistency is exactly what gets called into question when the numbers are inconvenient.

Enter, The President

Asked in the Oval Office whether he was concerned by the 4.2 per cent CPI reading, Trump was casual. "The numbers were great," he remarked. "You know what I really love? I love the inflation."9 His reasoning, which is yet to be seen as correct, is that prices will fall rapidly once the conflict with Iran is resolved. Regardless of that, what the remark does, in the short term, is ease the political pressure on Warsh to act quickly. However, what it does long term is potentially more corrosive: a president on camera expressing enthusiasm for above-target inflation is the kind of signal that makes inflation expectations harder to stabilise.

Central banks spend decades building credibility that allows them to manage expectations, and can lose it in a single press conference.

Closer To Home

The implications of this run well beyond Washington. The Bank of England held its own rate at 3.75 per cent at its April meeting, but it wasn't unanimous, with one member of the Monetary Policy Committee already pushing for a hike to 4 per cent.10 UK CPI is projected to reach a peak between 3.6 and 3.7 per cent by the end of 2026, with markets pricing roughly 50 basis points of further tightening over the next 12 months. UK GDP growth this year is forecast at just 1 per cent, near the bottom of all major economy projections.11 A more strict Federal Reserve tightens global financial conditions, strengthens the dollar, and further narrows the Bank of England's already restricted room to manoeuvre. The June 18th MPC decision falls in the same week as the Wednesday Fed announcement, as well as a European Central Bank meeting. Three of the world's most powerful central banks. One week. Markets will not get a moment's rest.

The test for Kevin Warsh this week goes beyond any technical aspects. Getting the rate decision right, which, for now, implies holding, is the easy part. The hard part is to establish, in his first public act as chair, that the Federal Reserve remains an institution that follows the data, rather than the president. In a week when data says one thing and the president says he loves it, that distinction has rarely mattered any more.

Footnotes

  1. Washington Post (opens in a new tab), 22 May 2026. Swearing-in ceremony at the White House; first Fed chair sworn in at the executive mansion since Alan Greenspan in 1987. ↩

  2. Charles Schwab (opens in a new tab), May 18 2026. Warsh's monetary barbell strategy; balance sheet reduction approach; Fed funds rate at 3.50–3.75%. ↩

  3. CNBC (opens in a new tab), 13 May 2026. 54–45 confirmation vote; closest in the modern era of Fed leadership; Fetterman as sole Democratic crossover. ↩

  4. Bureau of Labor Statistics — CPI May 2026 (opens in a new tab), official release. CPI 4.2% annual; energy index +23.5%; energy accounts for more than 60% of the monthly all items increase. ↩

  5. Bureau of Labor Statistics — PPI April 2026 (opens in a new tab), official release; CNBC (opens in a new tab), 13 May 2026. PPI April 2026: 6.0% year-on-year, highest since December 2022; monthly gain 1.4%, nearly triple the 0.5% analyst forecast. ↩

  6. CME FedWatch via GrowBeanSprout (opens in a new tab). 97%+ implied probability of no rate change at the June 16–17 FOMC meeting, as of 13 June 2026. ↩

  7. Bureau of Labor Statistics — Employment Situation May 2026 (opens in a new tab), official release. May non-farm payrolls: 172,000; above consensus expectations; upward revisions to prior months. ↩

  8. CNN Business (opens in a new tab), 11 June 2026. Warsh's preference for trimmed-mean inflation averages; Bank of America credibility warning; William Blair analyst Richard de Chazal commentary. ↩

  9. CBS News (opens in a new tab), 10 June 2026. Full Oval Office exchange; Trump's reasoning linking inflation to the Iran/Strait of Hormuz conflict. ↩

  10. Bank of England — Monetary Policy Report, April 2026 (opens in a new tab), official release. MPC vote 8–1; dissenting member voting for hike to 4%; Middle East energy price uncertainty cited. Approximately 50 basis points of further BoE tightening priced by markets. ↩

  11. Oxford Economics — Key Themes 2026 (opens in a new tab). UK GDP growth forecast of 1% in 2026, near the bottom of consensus. ↩