Kevin Warsh, U.S. Federal Reserve chairman nominee, is moving swiftly through congressional approval procedures, raising the likelihood that he will take office on the 15th (local time). Wall Street had initially viewed Warsh's nomination as uncertain due to the Donald Trump administration's rhetoric targeting current Fed Chair Jerome Powell, but as things stand, there is little room for a vacancy in the chairmanship. The problem is that Warsh, nominated on expectations of rate cuts, is facing mounting pressure over a monetary policy pivot. U.S. inflation continues to rise rapidly even excluding the surge in energy prices driven by the Middle East war. Employment, by contrast, remains stable, and resistance to further rate cuts within the Fed is considerable. Moreover, if Powell remains on the Fed as a governor, there is still room for conflict between the Fed and President Trump even after Warsh takes office. Markets now see the probability of a rate hike within the year as far higher than that of a cut, and are betting accordingly.
Warsh Clears Board Confirmation...Chairmanship Vote on 13th, Inauguration Expected on 15th
According to Bloomberg, the U.S. Senate on the 12th passed Warsh's confirmation as a Fed governor by a vote of 51 to 45 in a plenary session. Fed governors serve 14-year terms. Fed board and chairmanship positions require separate Senate confirmation procedures. A separate vote on Warsh's chairmanship is expected on the 13th. Since current Fed Chair Jerome Powell's term ends on the 15th, Warsh could take office that same day if procedures proceed smoothly. Once Warsh assumes the chairmanship, he is expected to preside over the Federal Open Market Committee (FOMC) meeting on the 16th-17th of next month. This will be the first change in Fed chairman in eight years, since Powell took office on February 5, 2018.
Earlier, President Trump nominated Warsh as the next Fed chairman on January 30 this year, pinning hopes on a benchmark interest rate cut. Warsh's nomination subsequently cleared the Senate Banking Committee on the 29th of last month.
With Warsh, who served as a Fed governor from 2006 to 2011, returning to the board, pro-White House interim governor Stephen Miran is likely to step aside. This is because Powell has signaled his intention to remain as a governor even after leaving the chairmanship. At a press conference immediately following the FOMC regular meeting on the 29th of last month, Powell said, "I will continue to serve as a governor for some time even after my term as chairman ends," adding, "I will not leave the board until the (U.S. Justice Department's) investigation (into the Fed and me) is transparently, finally, and completely concluded." Powell's term as governor runs until January 31, 2028. Miran joined in September last year following the sudden resignation of former governor Adriana Kugler. Since becoming a Fed governor, he has argued for rate cuts in every FOMC regular meeting through last month, aligned with the White House stance.
The Fed that Warsh will lead is in the midst of historic division due to President Trump's attempts at intervention and the Middle East war. At last month's FOMC, for the first time since October 1992 — 34 years ago — four of the 12 voting FOMC members dissented. Miran argued for a 0.25 percentage point rate cut, again opposing the rate hold, while Dallas Fed President Lorie Logan, Cleveland Fed President Beth Hammack, and Minneapolis Fed President Neel Kashkari, while voting for the hold, opposed statement language suggesting the possibility of rate cuts. All three of the officials strongly opposed to rate cuts had joined as FOMC voters this year. If Powell, who has a fraught relationship with President Trump, remains on the Fed while Miran departs, Warsh's policy dilemma will only deepen.
Pro-Trump Miran Out, Powell Stays Amid Record Fed Division...Inflation Also Soars
The burden Warsh will shoulder is not limited to the clash between President Trump and the Fed. U.S. inflation, which was already high even before the war between the U.S.-Israel and Iran, now shows no sign of easily coming down with the added surge in international oil prices. Indeed, on the 12th, the U.S. Labor Department announced that the April Consumer Price Index (CPI) rose 3.8% from April of last year. This is the highest rate of increase in three years, since May 2023. The increase was also larger compared with 2.4% in February and 3.3% in March, just before the outbreak of war. On a month-over-month basis, prices rose 0.6%, narrower than the 0.9% gain in March but still higher than pre-war levels.
Core CPI, which excludes volatile energy and food, rose 2.8% year-on-year and 0.4% month-over-month, exceeding market forecasts of 2.7% and 0.3%, respectively. These figures were also higher than March's 2.6% and 0.3%. This means that inflation rates other than the energy price increase from the Middle East war also remained elevated.
In detail, the energy sector rose 3.8% month-over-month in April, accounting for more than 40% of the overall price increase. Energy commodity prices rose 5.6% in a month, while gasoline and fuel oil rose 5.4% and 5.8%, respectively. Housing costs, which account for about 33% of the CPI weight, rose 0.6% month-over-month, and food prices rose 0.5%. In particular, beef prices surged 2.7%. The April Producer Price Index (PPI) will also be released on the 13th.
Moreover, as tensions in the Middle East have escalated again recently, international oil prices have shown no sign of coming down this month. On this day, Brent crude futures on the ICE Futures Exchange in London rose 3.4% to $107.77 per barrel, while June delivery U.S. West Texas Intermediate (WTI) futures on the New York Mercantile Exchange rose 4.2% to $102.18 per barrel. As inflation concerns spread, the 30-year U.S. Treasury yield jumped to 5.03%, breaking back above the 5% level for the first time since the 4th. Since 30-year yields serve as a benchmark for U.S. mortgages and investment-grade corporate bonds, 5% is regarded as a psychological line in the market.
With prices unstable, President Trump has also begun considering desperate measures. In a CBS interview on the 11th, Trump said, "Suspending the federal gasoline tax is a great idea," adding, "We will eliminate the federal gasoline tax for a certain period and restore it when oil prices fall." In the U.S., federal taxes of 18 cents per gallon (about 3.78 liters) are imposed on gasoline and 24 cents per gallon on diesel. The Trump administration also planned to announce a temporary suspension of the tariff-rate quota (TRQ) system applied to imported beef but put it on hold due to backlash from U.S. farmers and some Republican lawmakers. TRQ is a system that imposes low tariffs up to a certain import volume and high tariffs only on volumes exceeding that. Suspending it would allow more imported beef to enter the U.S. at lower tariffs.
Goldman, BofA Push Back Rate Cut Timing on Stable Employment...Markets See 36% Chance of Year-End Hike
As inflation keeps rising due to the prolonged war, Wall Street has sharply shifted its monetary policy outlook toward higher rates. Behind this is also the view that employment, unlike prices, remains relatively stable. Indeed, on the 8th, the U.S. Bureau of Labor Statistics (BLS) announced through the nonfarm payrolls report that U.S. jobs increased by 115,000 in April. This was more than double the market expectation of 55,000. The unemployment rate also remained stable at 4.3%. U.S. nonfarm payrolls in March, just after the outbreak of the Iran war, also came in 178,000 higher than February, completely overturning Wall Street's expectation of just a 59,000 increase.
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