Editor's note: He Weiwen is a senior fellow of the Center for China and Globalization. The article reflects the author's opinions and not necessarily the views of CGTN.

Kevin Warsh was confirmed by the US Senate to be the chair of the Federal Reserve on Wednesday, succeeding Jerome Powell who has had a deeply strained relationship with US President Donald Trump on account of his unwillingness to slash interest rates. Powell has resisted Trump's repeated demands and insults, calling for the Fed rate to be cut drastically from the current high level of 3.50-3.75%. Trump had said explicitly that he would not nominate anyone who wasn't loyal to him as the new Fed chairman. He hand-picked Kevin Warsh, whose father-in-law has been a close friend of Trump for decades, with the hope that Warsh would do what Powell has refused. However, Kevin Warsh denied any such commitments to Trump during the Senate hearing.

Nonetheless, the immediate concern from around the world remains — will Warsh be loyal to the Federal Reserve Act and independent of the White House? Or will he be loyal to the president in a roundabout way? In the latter case, not only will a Fed rate cut be on the immediate agenda, but it also risks damage to the Fed's role and independence.

The US Fed follows the mandate of the Federal Reserve Act, the objective of which includes two basic aspects: Firstly, to keep price stability, with the Personal Consumption Expenditures (PCE) price index at 2% as the threshold. Normally, an inflation rate above 2% rules out rate cuts. On the contrary, it might trigger a rate hike when it shows a rising trend. Secondly, to support full employment. Normally, a rising unemployment rate supports a rate cut, and a falling or stable unemployment rate does not. Following this standard, the Fed cut rates three times in 2025 very moderately and kept the rate unchanged in January 2026, leaving the Federal Funds Rate at 3.50-3.75%. In the background, the Fed PCE stood at 2.9% in December 2025.

The recent US-Iran conflict and the blocking of the Strait of Hormuz have resulted an opposite scenario, pointing towards a Fed rate hike instead of a cut. It has caused oil prices to soar, passing on to consumers fast, far exceeding the 2% PCE threshold for a rate cut. The Fed PCE rose to 3.5% in March and 3.8% in April year on year, with April PCE up 0.6% over March — a clear upward trend. A survey by JPMorgan showed that the expectation has turned toward a Fed rate hike, instead of a cut, and the rate hike cycle will continue into 2027. A Bloomberg report also found that the market had estimated more than a 50% probability of Fed rate hikes before rate cuts by April 2028. The governors of the federal reserve banks of St. Louis and Chicago also agreed with Jerome Powell's stance toward Fed rate hikes to fight inflation.

The crucial factor is not the short-term prospect of a Fed rate hike, but how Kevin Warsh will handle it. Known as being hawkish, he is said to be focused on price stability. Known as flexible, he is known for favoring shrinking the Fed's balance sheet as an alternate tool, to be followed by a possible rate cut. Three meetings of the Federal Open Market Committee (FOMC) after Kevin Warsh becomes the new Fed chair — to be held during June 10-11, July 29-30 and September 29-30 — will be crucial. Some estimates include: The June FOMC meeting will check the core PCE. If the core PCE has been under 2.8% for 1-2 months, a rate cut discussion could be possible. The balance sheet shrinking will keep the current tempo. The July FOMC meeting will decide the balance sheet shrinking tempo to $70 billion of Treasury bills (T-Bills in short) per month, up from the current $60 billion. The September FOMC meeting will examine the PCE level — if it's falling to 2.5% for three months, with 2.2-2.3% as the target for 2027. If the threshold is met by then, a small step rate cut (25 basis points each time) will be triggered. Meanwhile, the balance sheet shrinking tempo will be accelerated to $80 billion T-Bills per month.

There is little hope of core PCE falling to 2.8% in May, still less to 2.5% by June. Hence, it is unlikely to trigger a rate cut in the coming months by the Fed under Kevin Warsh.

On the other hand, a real possibility of the Fed's balance sheet shrinking in the coming months will create new uncertainties. As the Trump Administration is deeply entangled in a huge Federal budget deficit, estimated at close to $2 trillion for fiscal year 2026, it has no choice but to issue treasury bills, raising the government's debt, which has been increasing by roughly $7 billion per day and is close to $40 trillion. Fed balance sheet shrinking will add considerable pressure on the bond market, pushing up the yields, which are already close to 5% for 30-year T-Bills.

The effects of such a hawkish yet flexible policy by Kevin Warsh on the capital markets remain to be seen, with a likelihood of depressing the gold price and lifting the dollar. In the end, however, the key to the Fed rate change is not held by the new Fed chairman, but by the Strait of Hormuz.