(The Wall Street Journal, Matt Grossman and Peter Santilli, May 19, 2026)
Kevin Warsh arrives at the helm of the Federal Reserve with two clear goals: to lower interest rates and reduce the central bank’s balance sheet. But current economic conditions make both goals very difficult to achieve. Inflation has surged sharply in the last two months due to the war in Iran and the spike in energy prices, while the labor market has stabilized, removing room for rate cuts that Trump instead insists on.
The Fed has already revised downward its expectations for cuts: in March only one cut was expected in 2026, but now futures markets price in none. Warsh, who had pushed for reductions based on productivity gains from artificial intelligence, will have to face a majority of more cautious colleagues and Jerome Powell himself still present on the committee.
The second pillar of his agenda, namely reducing the Fed’s balance sheet currently at $6.7 trillion, also appears complicated. Previous attempts at contraction have created tensions in bond markets and forced the central bank to quickly reverse course. Warsh will therefore have to navigate political pressures, adverse macroeconomic data, and a divided committee.
Rising inflation blocks cuts.
“A worrying rise in inflation over the past two months has left Fed officials unwilling to deliver the rate cuts that President Trump wanted. The labor market has shown signs of stabilization, further reducing the case for easing.”
Markets do not expect cuts.
“At the beginning of the year traders were betting on two cuts in 2026. But when the war in Iran started those expectations practically disappeared. Now futures show that on average traders do not expect cuts in 2026.”
Fed balance sheet hard to reduce.
“Warsh has long criticized the Fed’s balance sheet as too large. But previous contraction attempts created anxiety in the bond market and forced the Fed to quickly reverse course and grow reserves again.”
Trump’s pressure on rates.
“Warsh won the nomination with a two-pronged agenda for the central bank: lower rates and a smaller balance sheet. But economic conditions will make it difficult to achieve either of those goals.”
(Excerpt from the newsletter by Giuseppe Liturri)
