Last Wednesday, the US Fed’s newly minted chair Kevin Warsh showed an eagerly waiting and watching world that he is his own man, not his master’s voice.
In a move that was widely anticipated, but nonetheless hugely reassuring for other central banks apprehensive of any hint of political influence, the US Federal Reserve held its policy (fed funds) rate unchanged at the first Federal Open Market Committee (FOMC) meeting chaired by Warsh.
No doubt, rising inflation in America had a great deal to do with the Fed’s 12-member FOMC’s unanimous decision to hold that rate at 3.5-3.75% for the fourth successive time. At 4.2% in May, inflation is already the highest since April 2023 and is likely to go higher before it begins to fall, even assuming West Asia’s fragile peace deal holds.
US President Donald Trump may “love” inflation, as he recently said, but the public does not. The Fed is alive to that. Given its dual mandate to keep inflation at its long-term target of 2% while ensuring maximum employment, Warsh did not really have much choice.
Unlike in India, where the Reserve Bank of India (RBI) governor has an outsized say in rate decisions—thanks to his casting vote and the fact that its six-member Monetary Policy Committee has evenly matched internal and external voting members—Warsh has only one of 12 FOMC votes. So even if he wants a rate cut, he has to convince at least six other policymakers to join him.
This is a difficult task, given that America’s inflation outlook for the end of 2026 has been marked up to 3.6% from 2.7% earlier, while growth was notched down only a bit to 4.3% from 4.4 % in the Fed’s March projections.
The Fed’s policy statement left no one in doubt about how it sees its priorities. “The Committee will deliver price stability,” it said. Warsh reaffirmed this at his post-policy press conference: “We’ve missed [the inflation target] for five years and we’re going to fix that.
Warsh the Fed chair, it appears, is not the same as Warsh the candidate who often called for lower rates, echoing Trump’s calls for cheaper credit. Though he did not submit any forecast of his own for the Fed’s ‘dot plot,’ which shows the rate expectations of policymakers, in accordance with his criticism of such forward guidance, the plot’s latest update reveals a sharp change in views.
In contrast to earlier positions, rate-setting panellists are now veering towards either no rate cuts or small hikes for the rest of 2026.
The Fed’s short hawkish statement was followed by a sharp selloff on stock markets amid a rise in short-term bond yields, as investors reacted to the news of hikes being more likely than cuts this year.
At the press conference, attention shifted to two of Warsh’s pet themes: a review of how the Fed takes decisions and how it addresses the public. Warsh has been critical of the central bank’s bloated balance sheet, with its $6.7 trillion portfolio of government debt and mortgage-backed securities, and its lengthy statements that he claims limit the space for Fed action. A shrunk balance sheet would imply monetary tightening, while terse statements may leave markets in the dark.
We will have to wait and watch how the Fed’s new chief goes about tackling these (among other matters he has set up task-forces for). But warily so, since what the Fed does today affects global markets, India’s included, with or without a lag.