While the trimmed-mean index has typically floated in the middle of the conventional inflation indices, it has recently dipped below them. To the extent the trimmed mean index becomes the Fed's preferred measure of inflation, it is not only approaching the Fed’s long-term 2% target but has also trended lower over the past three years. While it may sound like a case of moving the goalposts, elevating the importance of this measure could provide the Fed with a rationale for easier monetary policy.

The Fed is likely to communicate less

Warsh has been consistent in his desire to reduce the amount of Fed communications. In contrast to Chairman Jerome Powell’s leadership—who Warsh just succeeded--in which statements about the Fed’s thinking on economic conditions were notably more frequent, Warsh may reduce the number of official press conferences and encourage less public speaking by Fed Governors. While this could sound like a retreat into opacity, there is a contingent of market participants who would welcome such a change.

One reason for this support is that various Fed speakers sometimes expressed differing views, increasing uncertainty. But many have also regarded the Fed’s attempt to provide guidance on its economic views as unhelpful because it was often wrong. The figure below illustrates the stability of the Fed’s projections of its benchmark interest rate against the volatility of the actual rate. Simply put, the figure shows the Fed’s own projections too often failed to anticipate the need to lower or raise interest rates.

A reduction in Fed communication could increase market volatility, particularly on days when the FOMC announces its interest rate intentions. But to the extent that markets already build a consensus about expected rate changes, and that consensus evolves (sometime creating market volatility) with each economic data release, any additional volatility resulting from diminished transparency could be modest.

The importance of Fed independence

Kevin Warsh’s appointment as Chairman of the Fed has been clouded by public disagreements between President Donald Trump and the outgoing Chairman, Jerome Powell. The charges the U.S. Department of Justice brought against Powell have been dropped, but Powell’s term as a Fed Governor does not end until 2028 and he has indicated he could remain on the board until he is comfortable that the charges will not resurface. While the prior Chairman remaining as a Fed Governor is highly unusual—something not seen in almost 80 years—it could provide some brief continuity in Fed policy, and Powell has been clear he will defer leadership to Warsh.

Additionally, President Trump’s aggressive advocacy for lower interest rates during Powell’s term raised questions about the President’s commitment to an independent Fed and whether his decision to nominate Warsh implied he would provide some deference to the President in matters of monetary policy.

Financial markets have benefited from Fed independence for decades, and the most famous attempt by a President to interfere contributed to rampant inflation and a recession, resulting in the infamous stagflation of the 1970s. Then President Richard Nixon quipped about then Fed Chairman Arthur Burns, “I respect his independence. However, I hope that independently he will conclude that my views are the ones that should be followed.”  While many factors, including OPEC's quadrupling of oil prices in 1973, fueled stagflation, Arthur Burns’ interest-rate policy is widely regarded as a failure, and his legacy is tarnished by his presumed deference to Nixon.

For now, the market appears to have reached a consensus that despite Warsh’s credentials as an inflation hawk, he could lean dovish over time while remaining committed to Fed independence. But this does not mean markets are not watching closely, and it will likely take some time for confidence in Warsh’s commitment to be confirmed.

Is a test of Warsh’s commitment to independence imminent?

The current conflict in the Middle East has elevated oil prices, putting upward pressure on inflation. As oil reserves in both the public and private sectors already have been meaningfully drawn down, sustained conflict could have an increasingly negative impact on oil prices and inflation.

Meanwhile, at last month’s FOMC meeting, there was the greatest number of dissents from the committee’s published statement since 1992. Three regional Fed presidents indicated they did not support the Fed signaling the next change in interest rates is still likely to be an additional cut. If inflation continues to climb, Warsh may have an increasingly difficult time resisting these calls for a more hawkish policy and may even signal that higher interest rates are increasingly likely. Such a statement could raise the ire of the Executive branch that has advocated for rate cuts, and Warsh’s commitment to Fed independence could face an early test.

Specifically, any clear indication that containing inflation is a priority would likely boost the market’s confidence in Warsh’s leadership, providing immediate support to the Treasury market, while the opposite could significantly damage the market’s faith in Warsh, pushing bond yields higher.

Warsh may be just the right Chairman for the current environment

The majority of FOMC members had generally viewed the current level of interest rates as restrictive, leaving room to lower them as needed. But the conflict in the Middle East has created significant uncertainty about its effects on the economy and inflation. Even the U.S. Treasury Secretary, Scott Bessent, recently softened the administration’s push for lower interest rates, saying on April 22, “I believe rates should be cut,” but adding that he understands if FOMC members “want to wait for some clarity.”⁴

Clarity may not be coming soon. West Texas Intermediate (a grade of crude oil used as a benchmark in oil pricing) has been volatile around $100 a barrel for almost two months, and bond yields have risen across the world’s major economies as concerns about rising inflation take hold. Meanwhile, the market has priced out any rate cuts for the remainder of 2026, and it is increasingly likely the Fed could raise interest rates before cutting them again.

While the duration of the conflict in the Middle East is difficult to estimate, we take comfort in the knowledge that Warsh is highly qualified, understands financial markets and takes the Fed’s responsibility to contain inflation seriously. In our view, Warsh wants to succeed in his role as Chairman of the Fed. He respects the institution to the point of publicly admonishing it for choosing (his word) to allow inflation to rise. In periods of high uncertainty, having a leader who helped the Fed manage its response to the GFC could provide an anchor for global central banks and be just what financial markets need to successfully navigate the current environment.