Kevin Warsh, the Republican financier who recently took over as the chairman of the Federal Reserve, holds economic views that could, kindly, be described as adaptable. Last summer, he said that the Fed had committed “the greatest mistake in macroeconomic policy in forty-five years” by allowing inflation to surge post-COVID. This statement marked out Warsh as an inflation hawk, but late last year, after his name had surfaced as a possible candidate to succeed Jerome Powell as chair of the central bank, Warsh publicly argued that A.I. could generate big gains in productivity and be “structurally disinflationary.” The clear implication was that the Fed could now safely cut rates, a shift in policy that Donald Trump happened to be demanding.

In picking a replacement for Powell, Trump had said that he would choose “someone who believes in lower interest rates, by a lot.” Warsh subsequently got the nod, and last week he presided over his first meeting of the Federal Open Market Committee (F.O.M.C.), the policymaking body that determines interest-rate policy. But, far from cutting the cost of borrowing as Trump wanted, the committee revealed that nine of nineteen officials believed that at least one rate hike would be appropriate later this year. Eight members projected that the federal funds rate would remain within its current range of 3.5 to 3.75 per cent. Only one member saw a rate cut in the cards. Warsh himself declined to provide a prediction. At a press conference after the meeting, though, he talked tough, noting that the Fed hadn’t met its inflation target in more than five years, and declaring, “This committee will deliver price stability.” In the futures markets, traders priced in the possibility of a rate rise in September.

Last month, the rate of inflation jumped to 4.2 per cent, its highest level in more than three years. Trump’s needless war with Iran is largely to blame, because it has boosted energy prices. In this environment, it’s entirely reasonable for the Fed to reconsider its policy stance, but Warsh’s hawkish pivot went well beyond what many on Wall Street expected. “We thought he was a dove who favored lowering the federal funds rate (FFR) because he believes that AI is boosting productivity and economic growth while keeping a lid on inflation,” Ed Yardeni, the president of the financial-consulting company Yardeni Research, wrote. The question now is whether Warsh’s début was an early show of independence, a calculated bet, or the start of a very short honeymoon. The Fed meeting took place when President Trump was in Europe for the G-7 summit. When reporters asked him about the prospect of the Fed raising rates, he said, “It’s hard to believe. It just keeps a country down, you know.” Then, he added, “But we have a very good guy over there now. So, I’m guided by what he wants.”

This response was uncharacteristically equanimous. In 2019, during Trump’s first term, he called Fed policymakers “boneheads” for not cutting rates as fast as he wanted. The federal funds rate was between 2 and 2.25 per cent, and Trump said that Powell and his colleagues should cut the cost of borrowing to zero, or even into negative territory. After he returned to office last year, his attack on the central bank went beyond verbal insults. Trump tried to fire Lisa Cook, a Fed governor who was aligned with Powell, and one of his longtime political allies, Jeanine Pirro, the U.S. Attorney for the District of Columbia, launched a criminal investigation into Powell’s handling of a renovation project at the Fed’s headquarters in Foggy Bottom.

The courts blocked both of these trumped-up assaults on the Fed’s independence—assaults that reflected the President’s anger at having his wishes frustrated and his unidirectional attitude toward setting interest rates. His muted response last week suggested that he realizes his war of choice has left the central bank, and his man Warsh, in a pickle. But there’s no reason to suppose that Trump’s underlying views have changed, or to doubt that, before very long, he’ll be demanding the rate cuts that he believes are his due after outlasting Powell.

Warsh, who worked at the National Economic Council in George W. Bush’s White House before serving as a Fed governor from 2006 to 2011, is widely recognized as an adroit operator. One possibility is that, in his remarks last week, he was simply trying to burnish the inflation-fighting credentials he had undermined while publicly campaigning for the Fed job. No Fed chair likes to be seen as a soft touch or a patsy for the President, so it would make sense to lay down a marker early. On the other hand, perhaps Warsh really is an inflation hawk who sees his mission as returning the Fed to a narrow focus on price stability. In his press conference, he brought up Milton Friedman, the free-market economist and conservative icon, whose classes he took as an undergraduate at Stanford. Drawing on Friedman’s famous dictum that “inflation is always and everywhere a monetary phenomenon,” Warsh has argued in the past that the emergence of persistent price rises is ultimately a choice by the Fed. During the press conference, he returned to that argument, adding, “You bet it is.”

The problem with the theory of Warsh as a principled inflation fighter is that, as his statements over the past year or so make clear, his views have been all over the place. Looking further back doesn’t resolve this conundrum. Numerous commentators have pointed out that he has tended to be hawkish when a Democrat is in the White House, but considerably less so when a Republican holds power—particularly in the case of Trump. Paul Volcker, he isn’t.

The likelier explanation, in my view, is that Warsh is playing the odds. For more than a decade, before Trump nominated him, he worked as partner and adviser to Stanley Druckenmiller, a veteran hedge-fund manager who has made a vast fortune by betting on economic outcomes. Since the Trump Administration reached a tentative peace deal with Iran, the price of crude has declined. Warsh may be figuring that by the end of summer, the prices of gasoline and other energy products will drop much further. If that happens, the headline rate of inflation will likely also fall back, easing the pressure on the Fed to raise rates, and providing Warsh with an out. During the press conference, he refused to be drawn on what might happen: he’s a longtime critic of the Fed issuing so-called forward guidance about its policy intentions. But he did say that between now and the next F.O.M.C. meeting, at the end of July, the members of the committee will be “very attentive to incoming developments.”

If the shaky peace deal holds—the renewed closure of the Strait of Hormuz over the weekend was hardly encouraging on that front—Warsh could get lucky. Outside of the energy sector, other potential sources of inflation, particularly the labor market, seem benign. (In the past year or so, wages, which constitute a big part of firms’ costs, have been rising more slowly than prices.) Moreover, even before the recent surge in corporate investments in A.I., workers’ productivity had been accelerating—a development that can help keep firms’ costs, and the prices they charge, in check. On the other hand, the hoped-for sharp drop in inflation is far from guaranteed. The disruptions caused by the war could keep oil prices elevated for a longer period. In a worst-case scenario, the conflict could resume, generating another big price spike. An additional inflationary threat stems from the A.I. investment boom, which is leading to shortages of certain components, such as memory chips, and big increases in their prices. Pointing to sharply rising costs of production, Apple’s Tim Cook said last week that the company was being forced to raise prices on its products.

Investors in the bubbly stock market seem to be betting that Warsh and his colleagues will ultimately hold off a rate rise. One thing we can safely assume is that the Fed chair’s honeymoon with Trump wouldn’t survive a September hike, which would come just weeks before the midterms. Such a move would likely send the President into a rage—perhaps even one akin to the plate-throwing incident that, according to the former White House aide Cassidy Hutchinson, followed his discovery, in December, 2020, that Attorney General Bill Barr had said publicly that there was no widespread evidence of voter fraud in the 2020 election.

Warsh, who now has weekly breakfasts with Scott Bessent, Trump’s Treasury Secretary, will surely be hoping to avoid such an outcome, and for a while he may be able to. But at some point he will be forced to move beyond evasive answers, general statements of principle, and task forces set up to study various reforms he has advocated, such as changing the Fed’s communications strategy and reducing the size of its balance sheet. The job of Fed chair involves making decisions, some of them hard ones, and explaining them to interested parties, including the President. The real Kevin Warsh will eventually have to stand up. ♦