Warsh takes Fed helm as 2 governors oppose his agenda

Kevin Warsh took office as Federal Reserve chair Friday facing open opposition from two sitting governors who publicly broke with his policy priorities before he was sworn in.

Kevin Warsh became Federal Reserve chair Friday with the benchmark rate at 3.50%-3.75%, only to confront immediate internal dissent from two governors opposing his agenda to shrink the $6.7 trillion balance sheet and hold rates steady.

"Shrinking the balance sheet is the wrong objective, and many of the proposals to meet this objective would undermine bank resilience," Fed Governor Michael Barr said May 14 at New York University, declaring his opposition before Warsh took office.

Governor Christopher Waller went further on the day of Warsh's confirmation, saying he "can no longer rule out rate hikes further down the road if inflation does not abate soon," citing the Iran oil shock. The shift marks a sharp reversal: Waller dissented in favor of a rate cut as recently as January on labor market weakness, then voted for an FOMC statement with an easing bias in April. The next FOMC meeting is June 16, with Warsh's first press conference as chair scheduled for June 17.

The internal fractures threaten to undermine Warsh's authority before his first policy meeting. Markets are already pricing a diminished probability of rate cuts — the Atlanta Fed's tracker shows implied odds declining in recent months, with a roughly 6% probability of a hike — as tariff-driven inflation and the Iran oil shock keep price pressures elevated. US producer prices rose 6% in April, well above the Fed's 2% target.

Barr's Balance Sheet Warning

Barr, a protege of Senator Elizabeth Warren who resigned as Fed vice chair for supervision last year ahead of his likely removal by President Trump, argued that reducing the Fed's balance sheet from $6.7 trillion would threaten financial stability. The irony was not lost on Warsh's allies: Barr oversaw supervision during the 2023 regional banking crisis, when Silicon Valley Bank and Signature Bank collapsed under interest-rate risk that his team missed.

Warsh has made balance sheet reduction a stated priority, arguing the Fed's holdings should be reduced "slowly and deliberatively," as he testified during his confirmation hearing. Barr's public opposition shows he intends to remain a persistent internal obstacle.

Waller's Rate Reversal

Waller's about-face carries particular sting. He was a finalist for the Fed chairmanship before President Trump selected Warsh, and his January dissent for a rate cut aligned with Trump's public calls for lower borrowing costs. Now, with Warsh in the job, Waller has pivoted to a hawkish posture that effectively boxes in the new chair.

The shift echoes the Greenspan era — the model Warsh has explicitly embraced. Treasury Secretary Scott Bessent, who championed Warsh's nomination, has argued the Fed should resist premature rate hikes during technological booms. Warsh has said AI adoption will boost productivity and lower inflation, creating a path for rate cuts. But the Iran oil shock and tariff-driven price pressures have upended that thesis for now.

Warsh's ability to navigate these internal challenges will be tested at the June 16-17 FOMC meeting. With Powell remaining on the Board of Governors through 2028, some see a potential counterweight to aggressive moves. But Warsh's narrow 54-45 Senate confirmation — the slimmest margin for any Fed chair in US history — leaves him with limited political capital. If Barr and Waller continue to break publicly with his agenda, the new chair may find himself leading a divided central bank.

This article is for informational purposes only and does not constitute investment advice.