New Federal Reserve News Agency: The Federal Reserve Faces the Most Embarrassing Power Transition in History

In a complex economic and political environment, the Federal Reserve is about to face the most complicated and unpredictable power transition in decades.

Renowned journalist Nick Timiraos, known as the "New Federal Reserve Correspondent," recently pointed out that Kevin Warsh, the next Federal Reserve chairman nominated by Trump, is facing the most awkward power transition in decades. The current economic situation is far more complex than the promise he made last year to lower interest rates when he campaigned for the position.

Before the Middle East conflict drove up energy prices, the inflation indicators most closely watched by the Federal Reserve were already moving in the wrong direction. The outbreak of war further threatens to push inflation higher in the coming months. Market expectations have now reversed, with some even believing that the likelihood of interest rate hikes this year exceeds that of rate cuts.

Meanwhile, Warsh's Senate confirmation process has stalled. This raises significant uncertainty about whether Warsh will be able to smoothly take over when current Federal Reserve Chairman Jerome Powell's term expires in two months. Warsh may ultimately arrive at a Federal Reserve under pressure: on one side is a president demanding lower interest rates, and on the other are colleagues skeptical of rate cuts, while Powell has even hinted that he may not leave.

Policy Divergence: From "Continuity" to "Institutional Opposition"

Even without the aforementioned complexities, this power transition is destined to be unusual.

Nick Timiraos mentioned that Warsh has previously committed to a complete break with his soon-to-be predecessor. In the past forty years, no incoming Federal Reserve leader has done this. Powell and his predecessors Yellen, Bernanke, and Greenspan all promised continuity with their predecessors to soothe market sentiment during the transition.

In contrast, Warsh has publicly criticized the Federal Reserve under Powell's leadership regarding monetary policy, bank regulation, and other aspects over the past year. In a television interview last summer, he called for "change" and rejected the assumption that maintaining continuity with Powell is a good thing. He bluntly stated, "My God, I think that's the last thing we need."

Core Contradiction: Presidential Demands vs. Federal Reserve Realities

Trump has clearly expressed his expectations for the next Federal Reserve chairman. Before nominating Warsh in January, Trump stated that he would not appoint someone who does not share his views on interest rate cuts.

However, the winds within the Federal Reserve are changing. Powell led the central bank to three rate cuts last fall, but each cut faced increasing resistance from the 12-member Federal Open Market Committee (FOMC). In last week's meeting, the Federal Reserve voted 11 to 1 to maintain interest rates.

Eric Rosengren, who served as president of the Boston Federal Reserve from 2007 to 2021, stated: "The reason he (Warsh) was nominated is that he expressed support for lower rates. But the problem is, the world is changing rapidly, and he cannot guarantee the voting outcome."

This directly points to the variable most closely watched by the market—policy implementability

Inflation and Oil Price Shock: Traditional Framework Fails

Regarding the current oil price shock, the traditional central bank logic is to "ignore the short-term rise in inflation," as the slowdown in growth offsets the upward pressure on inflation. However, the article points out that this premise is beginning to waver.

Rosengren bluntly stated: "This strategy relies on the public's belief that prices will fall back, but after five consecutive years of inflation above target, that trust is no longer taken for granted."

He further warned: "If interest rates are lowered in this environment, it may be perceived both within the committee and at the public level as being politically motivated rather than economically motivated."

This means that policy is not just a technical issue but also a matter of credibility. This challenging start has not escaped the eyes of central bank observers. Tim Duy, chief U.S. economist at SGH Macro Advisors, admitted: "The delay in the nomination of Waller is a gift for him. I do not envy the person who takes over this job at all."

However, some experts believe the outlook is not so pessimistic. James Egelhof, chief U.S. economist at BNP Paribas, stated: "The labor market is close to full employment. Financial conditions are loose. Financial stability is solid. While there is much work to be done, the transition should be manageable." He pointed out that investors do not expect Waller to immediately implement the kind of comprehensive reforms he has advocated.

Historical Reflections and Future Variables

The current oil price shock may be particularly tricky for Waller, as it sharply contrasts with his past positions. In 2008, when energy prices soared, the policies advocated by Waller, then a Federal Reserve governor, were precisely the opposite of what Trump now expects from him.

In April of that year, Waller reluctantly supported the last rate cut of 25 basis points and warned against encouraging "the FOMC's tolerance for inflation to exceed prudent levels." By June of that year, as oil prices approached $140 per barrel and pushed up inflation, Waller agreed with market expectations that the Fed's next move was more likely to be a rate hike. He emphasized that inflation risks "continue to dominate as the greater risk facing the economy."

Today, the conditions facing the Federal Reserve are different in significant ways: benchmark interest rates are higher, and the financial system is more stable. But the potential dilemma is similar: the oil price shock forces the Fed to weigh whether higher inflation or a weaker job market poses the greater threat.

Waller's Senate confirmation hearing will be the stage for him to articulate his latest economic views. However, due to a stalemate between a Republican senator and the Justice Department regarding Powell's criminal investigation, the hearing has not yet been scheduled. Powell stated on Wednesday that if a successor is not confirmed by the end of his term on May 15, he will continue to lead the Federal Reserve and will not leave the board until the investigation is "transparent and ultimately" concluded.

Nick Timiraos hinted at the end of the article that the future path of monetary policy will be bumpy. When Waller finally walks into the Federal Reserve building, Powell may not have left yet—again proving that this job is entirely different from what he initially envisioned. For the market, this uncertainty may exacerbate asset price volatility in the short term