Federal Reserve Chair Kevin Warsh has officially begun his four-year term at the central bank, pledging to follow 'the best of the Fed's traditions' while promising a comprehensive review of Fed operations. In his opening memo to the central bank's more than 20,000 employees, Warsh stated 'Our highest priority will be to get policy right in service to our remit and the national interest. We will ensure an environment that supports our people in doing their life's best work.' The memo, sent on Tuesday and reviewed by Reuters, signals Warsh's commitment to what he has described as an extensive reform agenda for a central bank he regards as having strayed from its mission. 'We won't rely on past practices when we find better alternatives,' Warsh declared, adding 'In the coming quarters, I expect that together we will have open, clear-eyed discussions of Fed strategies, policies, and operations.'
The latest inflation data presents a complex picture for Fed policymakers, with core PCE inflation at 3.3% suggesting price growth remains some distance from the Fed's 2% target, while a trimmed mean inflation measure shows a much lower 2.3%. As reported by Goodreturns, the Commerce Department's personal-consumption expenditures price index stood at 3.8% in April, with core PCE inflation excluding food and energy at 3.3% - the highest reading since November 2023 and up from 3.2% in March. However, the trimmed mean inflation measure, which removes the largest price increases and decreases using a fixed rule each month, shows a much lower reading. Dallas Fed researchers calculate that in April the trimmed mean measure was 0.7 percentage points lower than core PCE, with the main reason being a smaller weight on goods excluding food and energy, which are most directly affected by tariffs. The Federal Reserve Bank of Dallas trimmed mean index removes price categories that together account for more than half of consumer spending each month, discarding both sharp increases and steep falls.
Warsh has appointed two conservative analysts to advise him during his transition period as he takes over from former Fed Chair Jerome Powell. According to a source familiar with the new chair's first staffing decisions, as first reported by the Wall Street Journal, Daniel Heil is a policy fellow at Stanford University's Hoover Institution, where Warsh also worked prior to becoming Fed chair. Paul Winfree was formerly with the Heritage Foundation and assembled the chapter on Federal Reserve reform included in the think tank's controversial Project 2025 blueprint for conservative reform. Both analysts have helped Warsh on different research and writing projects in recent years, with Heil serving as a fellow at the Hoover Institution and working with the Group of Thirty think tank. The appointments were described as temporary contractor positions to help Warsh plan his first projects as chair.
A growing divide is emerging within the US Federal Reserve as more policymakers warn that interest rates may need to rise again if inflation fails to cool in the coming months. According to reports from Reuters, St. Louis Federal Reserve President Alberto Musalem said the inflation outlook has become increasingly concerning and suggested that a rate hike could be warranted if disinflation stalls over the next few quarters. Speaking at an economic conference in Reykjavik hosted by the Central Bank of Iceland and Northwestern University, Musalem said the risks now appear more skewed toward inflation than labor market weakness. The latest developments show Fed Governor Lisa Cook has joined this hawkish camp, stating she's closely watching the risk that companies could embed higher energy costs into prices while workers incorporate them into wages. Cook confirmed she's 'prepared to raise rates' if inflation doesn't fall in a timely manner. Federal Reserve Vice Chair Michelle Bowman has also joined the hawkish camp, stating she's 'optimistic' that once the war is over, supply disruptions will end and there will be a 'temporary' impact on inflation with 'minimal' hit to overall economic activity. However, she warned that 'should disruptions persist well into the second half of the year, we could start to see broader effects on inflation.'
The increasingly hawkish tone among several Fed officials could create complications for Federal Reserve Chair Kevin Warsh ahead of next month's policy meeting, his first since taking over the central bank. According to Reuters, President Donald Trump had selected Warsh partly on expectations that he would support lower borrowing costs to stimulate economic growth. However, the recent surge in fuel and gasoline prices has complicated that outlook, with policymakers now debating whether higher energy costs could spread more broadly across the economy. Fed Governor Chris Waller exemplifies this shift, saying he's looking to hold rates steady in the near term because he's become concerned higher oil prices could have a lasting impact on inflation, but 'can't rule out rate hikes if inflation doesn't come back down.' The difficult position officials now face is underscored by the latest data, which shows overall prices jumped 0.4% and those excluding food and energy prices ticked up 0.2% - a welcome reprieve but insufficient to ease broader inflation concerns. Recent economic data has further solidified market expectations, with the first-quarter GDP revised down to 1.6% from the initial 2.0%, missing market expectations and reinforcing the case for maintaining higher interest rates. The Federal Reserve is widely expected to leave its benchmark interest rate in the 3.50%-3.75% range at its June 16-17 policy meeting, with financial markets believing the Fed's next move will be to eventually raise rates from the current range.
Warsh has laid out specific ideas for Fed reform, including a desire to pare the Fed's $6.7 trillion balance sheet, to talk less specifically about coming interest rate decisions, and to discuss if there are alternate measures of inflation that better capture price pressures in the economy. In his memo, Warsh struck a more optimistic tone about the Fed's future, writing 'This new chapter at the Fed finds us in a time of great consequence for our nation. New technologies and new ways of doing business are arriving with unmatched speed.' He added 'I could not be more optimistic about all that we can achieve together.' However, Warsh's tenure begins on an unusual footing, as the Fed awaits a Supreme Court ruling on President Donald Trump's attempt to fire Governor Lisa Cook, seen as a direct threat to the Fed's independence in setting monetary policy. Additionally, Warsh will preside over a body that includes its former leader, Powell, who decided to remain in his seat on the Fed's Board of Governors because of the administration's efforts to influence the Fed. The first meeting with Warsh as chair - and likely his first substantive comments about the economy and monetary policy - will be on June 16-17, when the Fed is expected to hold interest rates steady but new economic projections will set expectations about where policy is heading under Warsh.
