Kevin Walsh has not yet officially assumed the role of Federal Reserve Chairman, but he is already deeply mired in challenges from all sides.

Written by: Zhao Ying

Source: Wall Street Journal

Kevin Walsh is about to take charge of the Federal Reserve, yet he faces a daunting policy legacy—resurgent inflation, deepening internal divisions, and political pressure from the White House. This situation bears a striking resemblance to six years ago when Powell misjudged inflation, but this time, the external variables are more complex.

According to a report by the Wall Street Journal on Wednesday, the Senate is expected to formally confirm Walsh as Federal Reserve Chairman this week. Just before the confirmation vote, the U.S. Bureau of Labor Statistics released April CPI data showing that consumer prices rose 3.8% year-on-year, the largest monthly year-on-year increase in nearly three years, surpassing the market expectation of 3.7%. Core CPI (excluding food and energy) accelerated month-on-month to 0.4%, up from 0.2% in March, and year-on-year rose to 2.8%.

Nick Timiraos, a journalist known as the "New Federal Reserve Correspondent," pointed out that this CPI report is the latest signal indicating that the earlier market pricing of interest rate cuts is no longer a feasible prospect for 2026. Traders are increasingly inclined to believe that the Federal Reserve may not cut interest rates at all this year, with some institutions even beginning to discuss the need for rate hikes.

For Walsh, who is about to take over the Federal Reserve, the core risk of this situation is that whether he chooses to cut rates early under political pressure or to stick to the inflation target and maintain interest rates, both paths will have far-reaching impacts on the credibility and independence of the Federal Reserve.

Powell's Legacy: An Expensive Misjudgment

Measured by the core responsibility of price stability, Powell's eight-year tenure leaves a record of "significant failure."

The most representative policy error by Powell occurred between 2020 and 2022. At that time, the Federal Reserve introduced a new monetary policy framework, clearly stating that it would tolerate higher inflation in the short term to achieve a long-term average inflation target of 2%.

Subsequently, due to large-scale fiscal stimulus and persistently low interest rates, inflation surged, peaking at an annual rate of 9.1% in June 2022. Powell characterized this round of inflation as "transitory," missing the window to tighten policy in advance.

Although Powell later admitted that the Federal Reserve should have raised rates sooner, and the subsequent tightening cycle successfully avoided an economic recession, inflation has never returned to the 2% target. The Federal Reserve has repeatedly been forced to halt the rate-cutting cycle, as inflation's resilience continually exceeded expectations. Now, the unexpected rebound in April CPI data indicates that this issue remains unresolved at the time of Powell's departure.

April CPI: The Emergence of Structural Inflationary Pressure

The unsettling aspect of April's inflation data lies not only in the overall figures, but also in its internal structure.

By segments, housing prices rose 0.6% month-on-month, and non-energy services prices overall increased by 0.5%, with a year-on-year growth rate of 3.3%. Clothing prices have accumulated a 4.2% increase over the past year, and appliance manufacturer Whirlpool announced a price increase of 10% in April. Meanwhile, the increase in inflation has exceeded wage growth, with real average hourly earnings declining by 0.3% year-on-year, marking the first negative growth in three years.

Timiraos emphasizes the structural changes in inflation. He pointed out that service prices, excluding energy and housing, rebounded in April, complicating the dovish narrative. The core argument for doves was that inflationary pressures would be limited to the goods sector and could be explained as the fading effects of lingering tariffs, hence the Federal Reserve need not discuss rate hike scenarios. However, service sector inflation often reflects domestic demand conditions rather than one-time supply shocks, making it harder to ignore.

Timiraos also highlighted the significant jump in airfare prices—potentially driven by the Iran War increasing fuel costs or reflecting broader domestic price pressures in the U.S.—making it difficult to discern signals and further obscuring policy judgments. He emphasized that the Federal Reserve's current real concern is not the monthly data itself, but the resurgence of public inflation expectations: once consumers and businesses begin to believe that high inflation will persist, the wage-price spiral may become self-reinforcing. At that point, even if the economy slows, it would be difficult for the Federal Reserve to rapidly cut rates.

Walsh's Dilemma: Cutting Rates or Not Cutting Rates, Both Are Risky Paths

Walsh is taking over a situation described by multiple economists as "impossible."

On the inflation front, the energy shock resulting from the Iran War is driving prices back up, with about 40% of April's CPI increase related to this. The Wall Street Journal notes that overly cutting rates in response to the energy shock could accelerate inflation; conversely, raising rates to combat this temporary oil price shock could trigger a recession.

On the political front, the Trump administration continues to exert pressure for rate cuts. Treasury Secretary Besant refused to promise at a Senate Banking Committee hearing that if Walsh does not cut rates as Trump wishes, he will not face legal action, merely stating that "it depends on the President." Trump has previously made it clear that if Walsh expresses a willingness to raise rates, he will not receive a nomination.

Internally, last month the Federal Open Market Committee (FOMC) saw the most dissenting votes since 1992, with three regional Fed presidents refusing to endorse any rate cuts, signaling growing internal resistance. Walsh will also face a Board of Governors and regional Fed presidents team that closely overlaps with Powell's era, including Powell himself—who plans to continue serving as a Board member until the end of his term.

Timiraos points out that the future direction of Federal Reserve discussions will largely depend on whether the transportation of fuels and goods in the Gulf can return to normal. If disruptions persist, discussions internally will find it hard to marginalize the rate hike topic.

Challenges and Changes: Can Walsh Navigate a Different Path?

The Wall Street Journal believes that Walsh possesses the policy capability and intellectual resources to tackle these challenges. One of his plans is to initiate a comprehensive review of the Federal Reserve's inflation models as early as possible, to test whether these models can send more accurate policy signals—believed to be a pragmatic step addressing the sources of repeated "misjudgments of inflation" during Powell's era.

However, Walsh also faces resistance from the establishment. Former Federal Reserve Chairs Ben Bernanke, Janet Yellen, and a group of Democratic economists do not agree with Walsh’s intention to challenge the monetary policy framework established in the post-financial crisis era.

The irony of history is that Powell incurred heavy costs precisely because he characterized inflation as "temporary." Today, the inflation environment Walsh is taking charge of is similarly fraught with uncertainty, with the temporariness of energy shocks intertwining with the structural pressures of service sector inflation, creating ambiguous policy signals. Whether the lessons from six years ago can truly be learned may be the most critical test of Walsh's tenure.