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Wall Street is betting that the Federal Reserve will raise borrowing costs by the end of this year to combat the jump in inflation triggered by the Iran war as Kevin Warsh takes the helm of the US central bank.
Warsh was sworn in as the world’s most influential central banker on Friday in a ceremony at the White House led by President Donald Trump.
The financier took the reins amid growing investor fears that the surge in energy and transportation prices caused by Trump’s war in Iran will trigger a prolonged bout of high inflation.
While Warsh said he believed the coming years “can bring unmatched prosperity that will raise living standards for Americans from all walks of life”, consumer price growth is running at its highest level in three years, outstripping wage rises.
The mounting inflationary pressures have prompted Wall Street to increase their bets on a potential rate rise. Traders in the futures market are now fully pricing in a quarter-point increase in rates by the end of 2026, a sharp shift from the start of this year when investors were expecting multiple cuts.
Those expectations have moved with market measures of inflation, which suggest investors believe the inflation rate in a year’s time could be roughly 4 per cent.
Trump told Warsh that he should do his “own thing” as Fed chief even as he has previously slammed former chair Jay Powell repeatedly for declining his calls for lower borrowing costs.
The president also vowed that Warsh would have the “full support” of his administration and that he wanted him to be “totally independent”.
“Unlike some of his predecessors, Kevin understands when the economy is booming, that’s a good thing. We don’t have to go crazy. Just let it boom,” Trump said. “We want to stop inflation, but we do not want to stop greatness.”
Fed governor Christopher Waller said on Friday that he agreed with several other senior policymakers who have said the central bank should shift away from its “bias” towards easing rates. Minutes from the central bank’s April meeting released this week showed that “many” officials had taken this view, including a trio of regional Fed bosses who had dissented with the inclusion of the easing bias in April’s statement.
Waller noted, however, that his view on the easing bias did not mean “we should be considering rate increases in the near future”. For rate increases to happen, inflation expectations would need to become “unanchored”, Waller said at an event in Frankfurt, Germany.
The two-year Treasury yield, which moves with interest rate expectations, rose to its highest level in more than a year, rising as much as 0.07 percentage points to 4.14 per cent.
Warsh’s first opportunity to put his imprint on US monetary policy will come in mid-June, when he will chair the rate-setting Federal Open Market Committee meeting for the first time, succeeding Powell.
Steven Blitz, an economist at TS Lombard, said Warsh would be given “no quarter” by markets, should he decide not to raise borrowing costs at his first policy vote.
“Failing to hike in June even if growth is stubbornly steady and far from surging, but with broad inflation risk rising is, in effect, an ease,” said Blitz.
Warsh is taking the helm of the central bank at a time when it faces the most serious challenge to its independence in recent history.
Trump repeatedly clashed with Powell, labelling him a “numbskull” and a “moron” for refusing to cut interest rates.
Warsh was the first chair since Alan Greenspan, who helmed the Fed from 1987 to 2006, to be sworn in at the White House.
“I intend to fill the role of chairman with energy and purpose, just the way Chairman Greenspan did,” Warsh said minutes before he was sworn in.
The ceremony in the White House’s opulent East Room was attended by several senior members of the administration and Congress, including Treasury secretary Scott Bessent, House speaker Mike Johnson and Senate majority leader John Thune.
Warsh was sworn in by Supreme Court Justice Clarence Thomas, alongside his wife Jane Lauder.
Former UK chancellor of the exchequer George Osborne also attended the ceremony, along with former Pimco chief Mohamed El-Erian.
Warsh, a former Fed governor from 2006 to 2011, won Trump’s nomination in January, when he beat a field that included White House economist Kevin Hassett, Waller and BlackRock executive Rick Rieder.
Warsh, who becomes the 17th chair of the US central bank’s board of governors, has been sworn in for a four-year term.