Federal Reserve Leadership Transition: Warsh Takes the Helm
The Federal Reserve underwent a leadership transition on May 15, 2025, as Kevin Warsh began his first term as the 17th chair of the central bank, succeeding Jerome Powell, whose second term as chair concluded. The transition occurs as the Fed faces questions regarding inflation, interest rate policy, and the size of its balance sheet.
Leadership Transition and Policy Stances
Jerome Powell's second term as Federal Reserve chair ended on May 15, 2025. He continues to serve as a member of the Board of Governors. Kevin Warsh, a former Fed governor from 2006 to 2011, was nominated by President Donald Trump in January 2026 and has begun his term as chair.
"A change in prices such that no one's talking about it."
During his April 21 testimony to the Senate Banking Committee, Warsh stated his view on price stability, defining it as "a change in prices such that no one's talking about it." This represents a departure from the current 2% long-term inflation target, which has been in place since 2012.
Recent Federal Open Market Committee (FOMC) Meeting
On April 29, the FOMC held its final meeting under Chair Powell, maintaining the federal funds rate at 3.50% to 3.75%. The meeting recorded a record number of four dissents, the most in 34 years.
- Stephen Miran voted for a quarter-point cut.
- Beth Hammack, Neel Kashkari, and Lorie Logan supported maintaining the rate but opposed the easing bias in the statement.
Markets now consider additional rate cuts in 2026 unlikely. The FOMC cut the federal funds target rate six times between September 2024 and December 2025.
Balance Sheet Reduction Plans
Warsh has criticized the size of the Fed's balance sheet. The balance sheet grew from under $1 trillion in August 2008 to nearly $9 trillion by March 2022. Quantitative tightening reduced it to $6.7 trillion as of May 6, 2026.
Warsh has stated an intention to further reduce the balance sheet, aiming for $3 trillion. Market observers note that selling long-term Treasury bonds could push yields higher, increasing borrowing costs for consumers and businesses.
Inflation and Economic Context
Energy prices have risen since February 2025 due to the closure of the Strait of Hormuz during the Iran war. Gas prices are currently $0.45 below their all-time high.
Powell attributed elevated inflation to tariffs on goods and the energy supply shock from the Iran war.
Stock Market Valuations
Powell stated in September that "by many measures, for example, equity prices are fairly highly valued."
The S&P 500's Shiller P/E ratio stood at 42.32 on May 13, the second-highest ever recorded, below only the peak of the dot-com bubble (44.19 in December 1999). The historical average Shiller P/E is 17.36.
Previous instances when the Shiller P/E exceeded 30 were followed by stock market declines of 20% to 89%. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite reached all-time highs in the past year.
Political Context and Differences
President Trump and former Chair Powell publicly disagreed over interest rates during the past year. Trump called for interest rates to be cut to 1% or lower, while the federal funds rate remained at 3.50% to 3.75%.
Powell stated that economic data, not political pressure, would guide policy decisions.