Who Really Controls the Fed?

11 minutes ago

5 min read

By Deren Ozbilge

For most of this fall, Wall Street has been focused on AI stocks and the midterm elections; however, the most surprising economic stories of the year came from the Federal Reserve. Kevin Warsh was picked to lead the Fed by President Trump, who has spent years pushing for lower interest rates. Unfortunately for President Trump, that isn't what happened. On September 16, 2026, the Fed raised rates by a quarter point to a range of 3.75% to 4%, which was its first hike since July 2023. Markets and economists think another hike could be coming at the December 9 meeting. On the bright side, a Fed that is willing to raise rates when inflation won't come down is a good sign, since it shows the central bank is still making decisions based on the data and is trying to keep inflation expectations under control. Although Warsh was expected to be the chair who lowered rates, he has ended up going off real data and surprising everyone.

Why Would a Trump Appointee Raise Interest Rates?

Pressure From the White House

Warsh took over at a time when the Fed was already dealing with a lot of political pressure. Over the past two years, President Trump threatened to fire Jerome Powell before his term ended. He also tried to remove Governor Lisa Cook, which was the first time in the Fed's 112-year history that a president tried to fire a governor. The Cook case went to the Supreme Court, and on June 29, 2026, the Court ruled in Trump v. Cook that she could stay in her position while the case continues. Warsh already had experience at the Fed, since he served on the board from 2006 to 2011 and was there during the 2008 financial crisis. However, his confirmation on May 13 was still very one-sided, with the Senate voting 54 to 45 and only one Democrat supporting him. When Powell was confirmed in 2018, the vote was 84 to 13.

The Ghost of Arthur Burns

Why people care about the Fed's independence goes back to the 1970s. Arthur Burns was the Fed chair under Richard Nixon, and he is remembered as the chair who was pressured to keep interest rates too low. The result of the low interest rates was years of high inflation. Inflation didn't come under control until Paul Volcker raised rates to very high levels in the early 1980s. However, the interest rate hike caused a serious recession, leaving investors nervous about the Fed. A central bank only works if people believe it will make unbiased decisions. That is why all eyes were on Warsh's first few months. Citizens wanted to see if the Fed was still acting independently.

Three Fires at Once

Even with the political pressure to cut, inflation made that hard to do. Prices have been above the Fed's 2% target for about five years, and in 2026 there were three main things pushing them up.

Energy.

The war with Iran caused energy prices to rise 20.4% from a year earlier. By September, gas went up 9.1% in that month alone, and airfares were up about 22% over the year.

Tariffs

Tariffs have continued to raise the price of imported goods. Businesses usually pass those extra costs on to shoppers, which makes it even harder for the Fed to get prices back under control.

3. Artificial Intelligence

Big Tech is expected to spend well over $700 billion this year on data centers, competing with the rest of the economy for chips, electricity, land, and workers. Goldman Sachs estimates this has added about half a percentage point to the Fed’s preferred inflation measure, which is interesting since Warsh once said AI could help bring inflation down.

The October Puzzle

At the October 27 and 28 meeting, the Fed decided to keep rates where they were even though inflation was still going up. Ten members voted to hold, and two voted for another hike. A lot of economists didn't understand the decision, and PGIM's chief U.S. economist called the pause puzzling. If the Fed thinks the economy is strong and inflation is still too high, it is hard to see why it would wait. Warsh did not give a clear answer, but he did say that politics played no role in the decision, which stood out since the midterm elections were a few days later. Some officials think the Fed should move faster in hiking the rates. Dallas Fed President Lorie Logan believes at least two more quarter-point hikes are needed.\

A New Lever Over Big Tech

One of the most interesting parts of Warsh's October press conference was what he said about Big Tech. He pointed out that since large tech companies are borrowing more money, higher interest rates will have a bigger effect on that spending. For a long time, companies like Alphabet, Microsoft, and Meta paid for most of their projects with the huge amounts of cash they had, so interest rates didn't affect them much. Now they are some of the largest bond issuers in the country, which means every rate hike makes it more expensive for them to keep building for AI. In a way, the Fed now has more influence over the AI boom than it used to. He also announced a change to how the Fed will meet. Starting in 2027, one of the Fed's eight meetings each year will be a strategy meeting with no vote on rates, and the year after that there will be two, which leaves only six regular chances to change rates. Warsh tends to say very little at press conferences, suggesting the Fed will act less often and give less guidance than it did under Powell.

Who Really Controls the Fed?

Why Would a Trump Appointee Raise Interest Rates?

Pressure From the White House

The Ghost of Arthur Burns

Three Fires at Once

The October Puzzle

A New Lever Over Big Tech

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