KEVIN WARSH FOR FED CHAIR: WHAT IT MEANS FOR RATES

The following information was released by the University of Virginia's Darden Graduate School of Business Administration:

By Lauren Foster

The wait is finally over. President Trump today announced Kevin Warsh, a former Federal Reserve governor, as his choice to lead the world's top central bank when Jerome Powell's term ends in mid-May. Trump praised Warsh as central casting and predicted he would be "one of the great Fed Chairmen."

The nomination comes as the central bank enters the final stretch of its years-long battle to stabilize prices without stalling the broader economy. While the markets have hummed with anticipation for weeks, the nomination of Warsh brings immediate questions about the central bank's independence and its future approach to a persistent 3% inflation floor. Warsh has previously called for a regime change at the Fed, criticizing its heavy reliance on data and its "bloated" balance sheet.

Warsh, 55, is a former investment banker who first made his mark at the Fed when he served from 2006 to 2011, a period that overlapped with the 2008 financial crisis. At 35, he was the youngest person to join the Fed in the central bank's history. In an institution dominated by Ph.D. economists, Warsh was known as a "markets guy" with a long list of contacts on Wall Street and in the banking community.

There is now much speculation about what Warsh might do as Fed Chair. In a Wall Street Journal op-ed published in November 2025, titled "The Federal Reserve's Broken Leadership," he praised the Trump administration and outlined changes he would like to see, including rethinking inflation "dogma."

Notably, while historically viewed as an inflation "hawk," Warsh has recently aligned with the administration's push for lower interest rates, arguing that productivity gains from AI can help keep inflation in check.

The Darden Report spoke with Dan Murphy, the Jung Family Associate Professor of Business Administration at the University of Virginia Darden School of Business, about the news.

What economic factors currently support the argument for increasing interest rates?

In terms of the Fed's dual mandate, the challenge is in forecasting the trajectory of unemployment and inflation under alternative monetary policy scenarios. Inflation remains above target, and unemployment is not too high. If these conditions are expected to persist, there is a strong case for rate increases. Possible pass-through from tariffs to prices, rising wages due to a reduction in the labor supply due to the immigration crackdown, and rising inflation expectations could exacerbate inflationary pressure and strengthen the case for higher rates.

What are the primary arguments for why the Fed should consider lowering rates?

If household spending and firm investment are expected to weaken, this could ease inflationary pressure and increase unemployment. Since rate changes take time to work through the economy, it could be prudent to lower rates soon in anticipation of weakness in the labor market. Proponents of lower rates also point to the potential productivity-enhancing effects of AI, which could help lower inflation and mitigate the inflationary risk of lower rates.

Why could shrinking the Fed's balance sheet complicate efforts to lower interest rates?

With respect to Warsh, it has been reported that he may be in favor of reducing the size of the Fed's balance sheet. All else equal, this would put upward pressure on long-term interest rates that tend to matter the most for spending (and hence unemployment and inflation). If, as has been reported, Warsh is also in favor of lower rates, there could be a tension between his desire for lower interest rates and his desire to reduce the size of the Fed's balance sheet.

About the University of Virginia Darden School of Business

The University of Virginia Darden School of Business prepares responsible global leaders through unparalleled transformational learning experiences. Darden's graduate degree programs (Full-Time MBA, Part-Time MBA, Executive MBA, MSBA and Ph.D.) and Executive Education and Lifelong Learning programs offered by the Darden School Foundation set the stage for a lifetime of career advancement and impact. Darden's top-ranked faculty, renowned for teaching excellence, inspires and shapes modern business leadership worldwide through research, thought leadership and business publishing. Darden has Grounds in Charlottesville, Virginia, and the Washington, D.C., area and a global community that includes 20,000 alumni in 90 countries. Darden was established in 1955 at the University of Virginia, a top public university founded by Thomas Jefferson in 1819 in Charlottesville, Virginia.