Trump has handed his man a poisoned chalice

May 25, 2026 — 11:59am

On Friday, Jerome Powell finally handed over the chair of the Federal Reserve Board to his Trump-anointed successor, Kevin Warsh. Powell might have stepped aside, but the legacies of his six-year tenure as chair will, however, linger and constrain Warsh’s ability to implement the “reform” of the Fed that he has promised.

Powell’s term as the Fed’s chair would have been challenging even if Donald Trump weren’t in the White House for much of it. Warsh may find his as challenging, for different, but still Trump-inspired, reasons.

The pandemic forced the Fed – and the Trump and Biden administrations – to take unprecedented actions to protect the economy and the US financial system.

The Fed slashed its policy rate to zero, bought bonds and mortgages and provided liquidity to corners of the economy it had never previously supported. Congress pumped more than $US5 trillion of fiscal stimulus into the economy.

The torrents of cash and credit and, in real terms, negative interest rates in the aftermath of the pandemic coincided with severe disruption to global supply chains and caused an inflation break-out that meant the US inflation rate soared to more than 9 per cent in mid-2022.

That forced the Fed into a rapid run-up in US interest rates as it, belatedly, responded to what it had thought was a “transitory” surge in inflation.

The inflation rate was down to 2.9 per cent and easing towards the Fed’s target of 2 per cent amid a series of interest rate reductions when Trump regained the presidency last year.

Then came Trump’s trade war on everyone.

While they have had less of an impact on inflation because of the erratic way they have been implemented, they are generally thought to have added about half a percentage point to the inflation rate.

Trump’s decision this year, in co-ordination with Israel, to mount an assault on Iran provoked the closure of the Strait of Hormuz and caused a massive spike in oil and gas prices, which has flowed through to gasoline and diesel prices and is steadily feeding into the prices of goods generally – and into the inflation rate.

Those events would, by themselves, be a challenge for any Fed chair, his fellow-governors, and the members of the Federal Open Market Committee (FOMC) that actually sets US monetary policies. But Powell has also had to deal with unrelenting and quite vitriolic attacks by Trump, including a legal action alleging fraud – because Powell hasn’t cut US rates far enough to satisfy the president.

Powell’s greatest legacy to the Fed is that he has defended its independence and, as minutes from the latest FOMC meetings show, that his courage in defying Trump (not a common occurrence in the US during Trump’s second term) has encouraged other Fed officials to demonstrate their own independence.

In a central bank noted for consensus-driven decision-making, there has been an unusual level of dissent this year.

For Warsh, who takes the chair with an agenda that would reshape the basis of the Fed’s policymaking, as well as the way it is presented to the audience of Fed watchers. But that streak of independence Powell (or should that be Trump?) has stirred within the Fed represents a threat to the new chair’s ability to impose his will on the organisation and deliver the rate cuts that Trump has demanded and expects of him.

With an inflation rate that is now about a percentage point higher than when Trump retook the White House and, thanks to the war in the Middle East, likely to continue to rise towards 4 per cent, it is more likely that the Fed will be forced to raise its policy rate than cut it.

The markets are pricing in at least one 25 basis point increase this year and the minutes of the April FOMC meeting show that a majority of its members believe higher interest rates may be necessary.

Warsh, despite being appointed because Trump believed he could deliver the big rate cuts the president says would enable the US economy to boom (and lower the cost of the government debt levels that have exploded during the fiscal profligacy), is unlikely to even try to reduce rates while the inflation rate is still rising.

He, and the Fed, would lose all credibility and he could easily trigger a revolt by his fellow FOMC members, and the bond market, if he tried.

Even Trump seems to have accepted that Warsh won’t be able to deliver what he wants, at least in the near term.

Trump also appears to have, belatedly, realised that threatening to sack Fed chairs or prosecute them with the flimsiest of pretexts hasn’t been helpful to his cause.

As Warsh was being sworn into his position on Friday, Trump declared that he wanted him to be “totally independent”.

“I want him to be independent and just do a good job. Don’t look at me, don’t look at anybody, just do your own thing and do a great job,” he told Warsh. It’s a pity he didn’t adopt the same view in relation to Powell.

In a central bank noted for consensus-driven decision-making, there has been an unusual level of dissent this year.

It also appears that it has dawned on Trump that his verbal and legal assaults on Powell and another Fed governor, Lisa Cook, haven’t endeared him to other Fed governors and FOMC members and that their desire to protect the Fed’s independence could backfire on him.

“Kevin will safeguard the Fed’s integrity. They’ll make their own decisions and hopefully make them well, but they’ll be listening to Kevin all the way,” Trump said hopefully.

The first test of Warsh’s relationship with the rest of the Fed will come at the FOMC’s next meeting, in the middle of next month.

Already there are governors saying rates may have to be raised. There is also some scepticism that Warsh’s plans to shrink the Fed’s balance sheet, adopt a new approach to measuring inflation and change its public messaging by ceasing to provide forward guidance (and the famous “dot plots” of economic projections) are appropriate in the current circumstances.

Trump’s key economic officials, Treasury Secretary Scott Bessent and the director of the White House economic council, Kevin Hassett, have tried to make the argument for lower rates by saying that the oil price-driven spike in inflation is “transient”, with Bessent saying that “nothing is more transient than a supply shock”.

Fed officials, and bond market investors, however, won’t forget that the last big supply shock – the supply chain disruption caused by COVID – was anything but transitory and produced the one big blemish in Powell’s legacy as chair, even if he subsequently presided over (until Trump returned) a rare “soft landing” for the economy, with inflation subsiding and unemployment near record lows.

Warsh has said he will decide monetary policy on its merits and has denied that the price of gaining Trump’s nomination for the role as chair was an agreement to cut rates.

The testing of his independence and credibility will come early in his tenure. He can’t even contemplate rate cuts before the full impacts of Trump’s tariffs and the war on Iran (if it ends and the strait reopens) have fully washed through the economy and the inflation rate has fallen back.

Even if he wanted to, it is unlikely that his newly-galvanised fellow FOMC voting members – who include Powell, who is defying convention by staying on as a governor until the Trump administration’s litigation against him has clearly ended – would allow him to.

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