Washington: Kevin Warsh takes over the Fed under Trump's pressure for rate cuts

Kevin Warsh on Tuesday officially took over as chair of the United States Federal Reserve, at a ceremony hosted at the White House by President Donald Trump in person, twelve days after the expiry of Jerome Powell’s eight-year term. Warsh, who is 56, becomes the eleventh chair of the Fed in the modern banking era, with a platform he formulated during his Senate hearings, foreseeing the simultaneous suppression of inflation and a gradual lowering of interest rates, goals that markets and part of the Federal Open Market Committee read as contradictory.

For Serbia, which holds large foreign-exchange reserves in dollars and whose public-debt bonds are partly linked to US references, every shift in Fed monetary policy directly affects the country’s borrowing costs and the dinar-dollar exchange rate. According to the National Bank of Serbia, foreign-exchange reserves at the end of April stood at 28.5 billion euros, with a significant share in short-term US Treasuries whose yield tracks the Fed’s main rate. A rate cut, which Trump has demanded for months, would reduce the National Bank of Serbia’s income from these investments but would make it easier for Belgrade to borrow on more favourable terms.

Powell, whose term as chair ended on May 15, remains at the Federal Reserve as a governor, the first such move by a former Fed chair in nearly 80 years. Powell during the last two years of Trump’s second term held a restrictive monetary stance, keeping the rate above the level the president demanded, which the White House framed as “obstruction of the economic plan.” Trump in several addresses accused Powell of “Trump derangement syndrome,” a phrase Warsh will not use during his term.

Markets weigh Warsh’s platform with reserve

US markets on Tuesday reacted with a moderate fall in the yield on two-year Treasuries, indicating investors believe an earlier rate cut than May projections is possible. But most analysts cited by CNBC predict the Federal Open Market Committee will hold the current position through the end of 2026, with a possible rate increase in early 2027 if inflation does not fall below the target level of two percent. The current personal consumption rate, which the Fed tracks as its primary indicator, stands at 2.9 percent and has not shifted significantly since the start of the year.

Claudia Sahm, chief economist at the consulting firm New Century Advisors and a former head of section at the Federal Reserve Board of Governors, said in a short analysis for The Economist that Warsh “arrives with a markedly pro-inflationary combination of fiscal and monetary signals,” because the Trump administration has simultaneously expanded the fiscal deficit through new tariffs and a corporate tax cut. In her estimate, if Warsh frees himself from White House pressure and continues Powell’s line, the Fed’s credibility will be preserved. But if he agrees to early rate cuts, the consequence could be a long-term rise in inflation and a fall in the dollar.

Brussels and Frankfurt cautious, Tokyo and Beijing with reason for concern

Brussels and Frankfurt are watching every Warsh move with particular attention, because monetary divergence between the Fed and the European Central Bank directly affects the euro-dollar rate, which in May weakened from 1.08 to 1.06 dollars. ECB President Christine Lagarde has not publicly commented on Warsh’s appointment, but signals from Frankfurt indicate that the ECB will hold its current rate of 2.15 percent regardless of Washington’s moves, in order to preserve inflation discipline in the eurozone.

Tokyo and Beijing have reason for concern. The Bank of Japan, which in March moved into a rate-normalisation cycle, could be forced to abandon a planned hike if Warsh moves to aggressive easing, which would weaken the dollar and strengthen the yen above a level Japanese exporters can absorb. Beijing, through the People’s Bank of China, signalled it will hold its current monetary policy, focused on supporting domestic consumption in the context of the prolonged deflationary pressure that has lingered in China since the start of 2024.

The next concrete date is June 17

The next concrete date is the Federal Open Market Committee meeting on June 17, when Warsh will preside for the first time over a formal vote on interest rates. According to market expectations, the probability of a 25 basis point cut is 28 percent, while the probability of holding at the current level is 67 percent. Washington analytical firms estimate Warsh will, during his first six months in office, maintain continuity in order to build credibility before moving to more concrete policies closer to Trump’s demands.

What do you think, will Warsh be able to reconcile Trump’s pressure with the Fed’s obligation to control inflation, or will this lead to a new institutional clash?