This central bank independence crisis may reshape the global monetary policy landscape.

Written by: Xu Chao

Source: Wall Street Journal

Kevin Warsh is about to take the helm of the world's most influential central bank, yet he is deeply mired in an unprecedented predicament: the energy shock triggered by the Iran war is driving inflation back up, while the Trump administration is not only continuing to pressure for interest rate cuts but also clearly indicating that if the cuts are not sufficient, this new leader will face legal scrutiny. Several economists have warned that Warsh is stepping into an "impossible" situation.

Last month, the Federal Open Market Committee (FOMC) saw the most dissenting votes since 1992, with three regional Fed presidents refusing to endorse an interest rate cut, signaling internal resistance is building.

On Capitol Hill, this game of chess has become public. Treasury Secretary Becerra, attending a Senate Banking Committee hearing, refused to commit that Warsh would not face prosecution if he failed to cut rates according to Trump’s wishes, merely stating that it "depends on the president." Trump has previously made it clear that if Warsh expresses a desire to raise rates, he will not be nominated, claiming he believes Warsh "actually wants to cut rates."

For the market, the core risk in this scenario is that regardless of whether Warsh chooses to follow political pressure and cut rates early or stick to inflation targets by maintaining rates, both paths will have far-reaching impacts on the credibility and independence of the Federal Reserve.

Senate procedure advances, confirmation countdown begins

According to the Wall Street Journal, the Senate completed a vote to end debate on Monday evening, with only two bipartisan supporters: John Fetterman from Pennsylvania and Chris Coons from Delaware. The plan is for the Senate to first confirm Warsh as a Fed board member and then as chair, with the entire procedure expected to be completed within this week.

Powell’s term will end this Friday. He has made a rare decision—to break an almost 80-year tradition by remaining on as a board member to prevent Trump from pressuring Fed officials to cut rates. Meanwhile, the Supreme Court is reviewing the case of board member Lisa Cook: Trump attempted to fire her in August 2025 over alleged mortgage fraud (Cook denies this), and she is currently remaining temporarily in her position.

The Democrats' opposition focuses on the independence of the Federal Reserve. While Republican Senate Banking Committee member Thom Tillis claims Warsh is a "qualified nominee," he stated he would vote against the nomination until the investigation into Powell by the Justice Department concludes. The Republican majority on the committee has a slim lead of 13 to 11, and Tillis’s opposing vote theoretically may be enough to block the nomination process.

Inflation rebounds, FOMC sees most dissent in 30 years

Warsh is taking over in a monetary policy environment deeply shaken by energy shocks. The Iran war has led to the closure of the Strait of Hormuz, through which about one-fifth of the world's oil was transported before the conflict, causing a chain reaction that has pushed preferred inflation indicators up to 3.5%.

At last month's FOMC meeting, the Fed maintained rates for the third consecutive time, but there were three dissenting votes, the most since 1992. The three regional Fed presidents voted against due to their disagreement with the expected signal that the next action would be an interest rate cut. The only dissenting voice in favor of a rate cut at the meeting was board member and Trump ally Stephen Miran—who Warsh is set to replace on the committee.

Several economists interpret this wave of dissent as a clear signal—if the Strait of Hormuz remains closed throughout May and the first half of June, more members may turn against an interest rate cut. San Francisco Fed President Mary Daly warned last Friday at a Hoover Institution meeting at Stanford that "clogged" supply chains could keep inflation above the 2% target for a longer period of time. Chicago Fed President Austan Goolsbee rebutted Warsh’s assertion that the productivity boom driven by artificial intelligence would create room for rate cuts, pointing out that the wealth effect is boosting consumption and investments in data centers are driving up costs for land and chips, adding "all of this seems to indicate that productivity growth is raising rather than lowering the ideal interest rate level."

Trump's pressure and threat of prosecution, political risk enters a new dimension

Former Fed economist and current Peterson Institute staff member David Wilcox stated that what Warsh faces on a macro level may just be "minor troubles," but the real first-order challenge is managing external relations with the president.

Trump's expectations for an interest rate cut have never been so clear. In a media interview, he stated that if Warsh expresses a desire to raise rates "he will not get this job," and claimed that the Fed "will undoubtedly" cut rates because "our rates are too high." He also said he "theoretically" believes in Fed independence but simultaneously stated that as a "smart person," his economic forecasts should be taken seriously.

More threatening signals came from a White House dinner. According to reports, Trump jokingly said that if Warsh fails to cut rates properly, he would sue him. At the Senate Banking Committee hearing, Democrat Senator Elizabeth Warren demanded Becerra ensure Warsh would not be prosecuted or investigated by the Justice Department for this reason. Becerra responded that "it depends on the president" and characterized Trump's remarks as "a joke." Warren pressed, "If it was just a joke, why not say so directly?"

This confrontation further brings the crisis of Federal Reserve independence to the forefront. The Justice Department had previously launched a criminal investigation into Powell, focusing on the overrun of a $2.5 billion renovation project at the Fed headquarters and whether Powell made false statements to Congress. Powell stated in a statement that the true focus of the investigation is whether the Fed's interest rate decisions "did not follow the president's preferences."

Institutional trust deficit, Warsh faces dual resistance from within and outside

Beyond the monetary policy framework, Warsh must also contend with a mood of skepticism from within the Fed. He has openly criticized the Fed during his long tenure at the Hoover Institution, claiming that the response to inflation during Powell's term constitutes "objective policy failures," which "the Fed has so far denied." These remarks have made many insiders wary of the new chairman.

Hoover Institution economist John Cochrane stated that Warsh's "top priority" upon taking office will be to "try to unite" FOMC members to support his vision for Fed reform, but he pointed out that Powell, who is beloved by Fed staff, remaining on as a board member "will not make this easy."

Warsh himself has already undergone a notable shift in policy stance. During his tenure as a Fed board member from 2006 to 2011, he was known as a hawk, frequently advocating for higher interest rates. However, since 2025, his rhetoric has clearly shifted, echoing Trump's assessment that rates could be significantly lowered, and in October of that year, he stated that the Fed's work "ran counter to the president’s policies." This shift is widely regarded as a key factor in his eventual nomination by Trump.

He is about to steer a giant bank facing unprecedented external political interventions, a widening internal divide, and renewed inflation pressure. How to find a balance between political pressure and the goal of price stability will be a core issue closely watched by the market in the coming months.