By Nick Timiraos

Kevin Warsh promised to overhaul the central bank and cut rates. He is being greeted by rising inflation, an oil shock and a confirmation in limbo.

Kevin Warsh is facing one of the most awkward Federal Reserve leadership transitions in decades.

The economy has grown more complicated than when he promised interest-rate cuts last year while campaigning for President Trump to nominate him for the job. Even before the war in Iran sent energy prices higher, the Fed's preferred inflation measure was heading in the wrong direction. The war threatens to push inflation higher still in the coming months, and investors now view rate increases to be more likely than cuts this year.

The confirmation process, meanwhile, has stalled, making it hard to say whether Warsh will take over when Fed Chair Jerome Powell's term ends in two months.

That means Warsh could ultimately arrive at a Fed under pressure from a president demanding lower rates and colleagues skeptical of cuts -- all while Powell has signaled he may not leave.

Even before those complications, the handover was shaping up to be unusual. Warsh had already promised a sharp break with the man he would follow, something no incoming Fed leader has done in the last four decades. Those Fed chairs -- Powell and his predecessors Janet Yellen, Ben Bernanke and Alan Greenspan -- eventually reshaped the institution in meaningful ways. But upon taking office, each pledged continuity with the person they followed, assuring markets during the handoff.

By contrast, Warsh spent the past year publicly savaging the Powell Fed's record -- on monetary policy, bank regulation and what he described as institutional drift into politically charged subjects beyond its core mandate. In a television interview last summer, he called for "regime change" and rejected the premise that continuity with Powell would be a virtue. "My goodness, I think that's the last thing that we need," he said.

Trump has made clear what he expects of his next Fed chair: Before naming Warsh in January, he said he wouldn't appoint someone who didn't share his view that rates should come down.

Powell led the central bank to cut rates three times last fall but encountered rising opposition on the 12-member Federal Open Market Committee with each reduction. The Fed held rates steady at its meeting last week on an 11-1 vote. The committee's drift away from rate cuts has made delivering on the president's expectations a thornier assignment for Warsh, who served as a Fed governor from 2006 to 2011.

"He wouldn't have gotten the job without indicating that he would believe that interest rates should be lower," said Eric Rosengren, who served as president of the Boston Fed from 2007 to 2021. "But the problem is that the world is changing pretty quickly, and he can't guarantee the vote."

The standard advice for a central bank facing an oil shock is to look past it on the theory that the hit to growth and the boost to inflation roughly cancel out. But that advice assumes the public trusts that prices will come back down, and after five years of above-target inflation, that trust is harder to take for granted.

Even if rate cuts prove justified, Rosengren said, the circumstances under which Trump gave Warsh the job risk casting suspicion on them. "There's going to be some distrust both in the committee and the public that if interest rates are lowered under these conditions, that it's politically motivated, not economically motivated," he said.

The degree of difficulty isn't lost on central-bank watchers. "A delay in the Warsh nomination is a gift to Warsh. I don't envy anyone taking that job now," said Tim Duy, chief U.S. economist at SGH Macro Advisors.

Others say the outlook isn't particularly dire. "The labor market is close to full employment. Financial conditions are easy. Financial stability is solid," said James Egelhof, chief U.S. economist at BNP Paribas. "There is work on the docket, but the transition should be manageable."

Egelhof said investors he speaks with don't expect Warsh to immediately pursue the type of wholesale overhaul that he advertised. Leadership changes at central banks have occasionally been transformational -- Paul Volcker at the Fed in 1979, Mario Draghi at the European Central Bank in 2011, and Haruhiko Kuroda at the Bank of Japan in 2013. But those leaders arrived at moments when a course correction had growing support, said Egelhof, who previously served at the New York Fed. "We don't think the Fed or its stakeholders perceive it as needing that type of turnaround," he said.

Warsh hasn't spoken publicly since late last year, but in the months before Trump named him, he and Treasury Secretary Scott Bessent argued that an AI-driven productivity boom would allow the Fed to cut rates without risking inflation. In recent weeks, several Fed officials pushed back on that argument.

The oil shock could be particularly confounding because as a Fed governor when energy prices surged in 2008, Warsh argued for the opposite of what is now expected of him by Trump.

The central bank had cut aggressively early in the year to cushion the economy against a deepening financial crisis. That April, Warsh reluctantly supported a final quarter-point rate cut and said at the rate-setting meeting that officials needed to be "prepared to stomach the continued weakness in the real economy that is in many of our projections." He warned against encouraging "the perception that the FOMC has a greater tolerance for inflation than is prudent."

That June, as oil prices closed in on $140 a barrel and dragged inflation higher, Warsh approvingly cited market expectations that the Fed's next move was more likely to be a rate increase.

Amid the unfolding global financial crisis, inflation risks "continue to predominate as the greater risk to the economy," particularly given signs that inflation pressures reflected deeper forces than the temporary oil shock, Warsh said. The Fed cut rates to near zero months later after the collapse of Lehman Brothers intensified the crisis.

The conditions the Fed faces today are different in important ways. Its benchmark interest rate is higher and the financial system is far more stable, but the underlying dilemma echoes: an oil shock that forces the Fed to consider whether higher inflation or weaker job-market conditions are the bigger threat.

Warsh's Senate confirmation hearing will offer a venue to address his latest views on the economy. But it has yet to be scheduled amid a standoff between a Republican senator and the Justice Department over the criminal probe of Powell. Sen. Thom Tillis of North Carolina has vowed to block Warsh's confirmation until the investigation ends. The lead federal prosecutor has promised to appeal a judge's ruling that threw out the DOJ's subpoenas.

Powell said Wednesday he would continue to lead the Fed if no successor is confirmed when his term expires May 15, and that he wouldn't leave the board until the probe concludes "with transparency and finality."

Asked about Powell's comments on Thursday, Trump gave no indication he wanted the investigation to end. "Certainly he should be lowering interest rates," Trump said. "All I want to do is bring out to the public that this guy is an incompetent."

It makes it more likely that when Warsh finally walks into the building, Powell hasn't walked out -- one more way the job looks nothing like the one he signed up for.