The Pallbearer Problem

Jerome Powell walks into his last FOMC meeting as Federal Reserve Chair today. Somewhere down the hall, the Senate Banking Committee is voting on his replacement. The timing alone tells you everything about how this institution has been treated for the past several years — not managed, not respected, not even politically outmaneuvered with any particular elegance. Just ground down.

The Senate Banking Committee vote on Kevin Warsh's nomination is scheduled for this morning, April 29, the same day as Powell's final FOMC meeting as head of the U.S. central bank. Symmetry as institutional humiliation.

The path to this moment was cleared last Friday, when the Department of Justice announced it was ending its criminal investigation into Powell — a probe that had largely centered on an ongoing renovation project at the Federal Reserve's headquarters. A renovation. The DOJ went after the chair of the world's most powerful central bank over a construction project. We are through the looking glass.

Senator Thom Tillis, who had blocked Warsh's confirmation, said the DOJ's decision removed a threat to the central bank's independence and promptly dropped his opposition. Senator Elizabeth Warren fired back that no Republican "claiming to care about Fed independence should support moving forward the nomination of Kevin Warsh." Both positions contain some truth, which is the most uncomfortable kind.

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Now, Warsh. The man is genuinely capable — a Bernanke lieutenant who navigated 2008 with more dexterity than most, and who has since spent fifteen years developing strong views on the thing he believes Powell got catastrophically wrong. Warsh has been an unabashed critic of the Fed's balance sheet, which rose from less than $900 billion in August 2008 to a peak of nearly $9 trillion by March 2022, before settling at $6.7 trillion as of late April. He wants to shrink it. Aggressively. And here is where things get genuinely interesting, because Warsh arriving at the Eccles Building with a wrecking ball aimed at the balance sheet is not a theoretical risk — it is a stated intent arriving into the middle of a genuine energy crisis.

Consider what sits on the other side of this Fed transition. The World Bank's latest Commodity Markets Outlook is forecasting a 24% surge in energy prices this year, calling the Iran war and Strait of Hormuz blockade a historic shock to global markets — the most significant energy price spike since Russia's invasion of Ukraine in 2022. Brent crude is now forecast to average $86 a barrel throughout 2026, a sharp increase from the $69 average in 2025, while WTI is already above $102 and Brent above $110.

July wheat futures climbed to $6.595 a bushel Tuesday, the highest since June 2024, up more than 11% since the start of the Iran conflict. In April alone, wheat is ahead 6.8%, up 29.8% year-to-date, and on track for a fourth straight monthly gain. Corn is up 8% since January. Fertilizer costs are spiking because fertilizer is made from natural gas and natural gas lives in the Gulf. The inflationary cascade is real and it is running.

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Into this, the Fed is supposed to hold rates steady — and it will. The current policy consensus is a "wait and see" approach, with energy prices potentially keeping inflation elevated while simultaneously suppressing economic growth. The classical stagflationary trap. The Bank of Japan, meeting yesterday, demonstrated exactly how pinned every major central bank currently is: the BOJ held its policy rate at 0.75% in a 6-3 vote while simultaneously cutting its growth forecast for fiscal 2026 to 0.5% from 1% and raising its core inflation outlook to 2.8% from 1.9%. Three dissenters wanted to hike. You can feel the tension even through the dry language of a central bank statement.

The yen sits at 159.12 against the dollar, weakened more than 1.5% this year, with strategists suggesting 162 is a line in the sand for BOJ tolerance. Currency defense dressed up as inflation control. Every major central bank is currently fighting a supply shock with demand-side tools they're reluctant to use fully, because the demand side of the economy hasn't actually broken yet.

That's the bind Warsh inherits. A historically expensive stock market counting on lower interest rates to fuel AI data center expansion won't be happy if a balance sheet reduction campaign pushes lending costs higher. The S&P closed at 7,138 on Tuesday, Nasdaq shed 0.9%. The Nasdaq's losses were partly driven by a WSJ report raising doubts about OpenAI's revenue growth, with CFO Sarah Friar reportedly warning leadership the company might not be able to pay its computing contracts if its top line doesn't expand. Oracle immediately defended the partnership. The market chose to believe the worry.

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The story everyone is telling themselves is that Warsh will be independent, competent, and pragmatic — that the confirmation theater was just theater, that the balance sheet hawkishness is negotiable, that Fed independence survived the siege. Maybe. Warsh himself stated during his hearing that Trump never asked him to pursue specific rate cuts, and pledged to be an independent actor. He has every incentive to mean it. The bond market would punish anything less.

But the scenario that keeps the serious people awake isn't a Warsh who cuts rates on command. It's a Warsh who runs an aggressive QT program into a fragile, energy-shocked global economy because he genuinely believes the balance sheet is the original sin — and discovers, eighteen months in, that liquidity withdrawal and a stagflationary supply shock are a combination the system wasn't designed to absorb simultaneously.

Powell's legacy is complicated and probably underappreciated. He held the line on independence through extraordinary pressure, kept the machine running during a pandemic and a war, and leaves with inflation above target but the financial system intact. The man being escorted out today was investigated over a renovation.

The institution deserves better than the last few years. It probably won't get better ones.

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Published April 29, 2026