Inflation Is Surging, Trump Wants Rate Cuts -- and Kevin Warsh Is Caught in a Market-Moving Crossfire

Smiles abounded as Kevin Warsh took his oath to serve as the newest Federal Reserve chair in the White House East Room two weeks ago. The happy expressions probably won't last long.

Inflation appeared to be under control enough for the Fed to cut rates several times in 2025. The situation has changed significantly since then. Normally, the central bank wouldn't proceed with further rate cuts amid resurgent inflation.

However, President Trump clearly wants rate cuts. Based on his past comments, he expects loyalty from those he has nominated to serve in powerful federal positions. This puts Warsh in the middle of a crossfire. And it could rattle the stock market.

Image source: Official White House Photo by Daniel Torok.

Problematic inflation

The Federal Reserve has historically sought to keep the inflation rate below 2%. Last month, the U.S. Bureau of Labor Statistics released its April inflation report, with the Consumer Price Index (CPI) coming in at 3.8%. This was the highest inflation rate since May 2023. By the way, the last time the Fed increased interest rates in July 2023, the CPI was 3%.

Unfortunately, the trend is emphatically not the central bank's friend. The CPI was 3.3% in March, and 2.4% both January and February. Inflation could rise even more. The Federal Reserve Bank of Philadelphia recently released its quarterly survey of professional economic forecasters. This survey found that the consensus among economists is that the CPI will jump to 6% for the second quarter of 2026.

Two key factors are driving inflation higher. The U.S. war with Iran resulted in Iran effectively blocking traffic flowing through the critical Strait of Hormuz. This disruption caused oil prices to soar. The longer that oil prices remain elevated, the more likely it is that the prices of other products will rise.

President Trump's tariffs are the other factor. An October study conducted by the Federal Reserve Bank of St. Louis calculated that tariffs accounted for 10.9% of headline Personal Consumption Expenditures (PCE) inflation. Another study published earlier this year by the Federal Reserve Bank of San Francisco explained that tariffs usually have a greater inflationary impact in the second and third years after they're first implemented.

Political pressure from the White House

President Trump repeatedly criticized Warsh's predecessor, Jerome Powell, for not moving quickly to cut interest rates. He stated publicly that Powell was "doing a bad job" and referred to him as "Mr. Too Late" and "Too Late Powell", among other names.

The president told NBC News that he wouldn't have nominated Warsh to succeed Powell if he wanted to increase interest rates. He also said that the Fed should do as he wants because he believes that he understands the economy "better than almost anybody."

However, Trump seemed to sing a different tune at Warsh's swearing-in ceremony. He said, "I want Kevin to be totally independent. Don't look at me, don't look at anybody." Does that mean there won't be any political pressure from the White House to cut rates? Don't count on it.

At a rally later the same day, Trump spoke about Warsh taking over as Fed chair, stating, "You watch what's going to happen. I had a rotten head of the Fed, and now I have a great head of the Fed. Kevin was just sworn in today. He's great; he's going to be great." Later in his speech, the president said, "You get the interest rates down, everybody's going to be very, very happy."

The markets are watching.

Warsh will almost certainly lose credibility if he pushes for rate cuts while inflation continues to rise. The perception of the Federal Reserve's political independence could also be damaged.

Of course, Warsh doesn't rule the Fed. He only has one vote. Other members could successfully block any attempt to reduce rates at a time when doing so could push inflation even higher. The bond market could also signal its displeasure forcefully enough to force Warsh and his allies to back down. The stock market would also likely experience intense volatility in such a scenario.

However, all of this is speculation at this point. Warsh has served on the Fed before. He has been former President George W. Bush's special assistant for economic policy and was executive secretary of the National Economic Council. He was a partner with Duquesne Family Office, headed by billionaire Stanley Druckenmiller.

Warsh knows what he's doing. He understands the effects of interest rates on stock and bond markets. Perhaps most importantly, he knows the markets are watching his every move.

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