Han Dieperink: Why a hawk like Warsh is cutting interest rates

June 9, 2026

_{This column was originally written in Dutch. This is an English translation.}

By Han Dieperink, written in a personal capacity

Kevin Warsh has been sworn in as the seventeenth Chair of the Federal Reserve. But anyone who interprets his appointment as a victory for looser monetary policy has not been listening carefully. He stands for the exact opposite.

Warsh wants to actively reduce the Fed’s balance sheet, which still stands at around $6.7 trillion, by selling government bonds and mortgage-backed securities. He wants fewer meetings of the Federal Open Market Committee, because a central bank that makes decisions every six weeks mainly generates noise. And he wants to do away with the deluge of forward-looking statements, starting with the dot plot, the interest rate forecast chart that confuses markets more than it guides them. Warsh is a monetarist in the spirit of Milton Friedman: less discretion, more discipline, rules over sentiment. That is the profile of a hawk.

And yet it is precisely this hawk who can deliver what the president wants from him: lower interest rates. That sounds like a paradox, but it is not. Warsh wants to reduce the remuneration the Fed pays on the more than $3.1 trillion in reserve balances held by commercial banks, currently 3.65% for what is essentially a risk-free investment. Paying banks less to park their money drives them towards government bonds. This increases demand for bonds and pushes down market interest rates. Balance sheet reduction and a lower policy rate thus become two sides of the same coin. Warsh is tightening where the money supply and the Fed’s credibility are concerned, and easing where the price of money is concerned. Trump gets his interest rate cut, but via a central banker who says he was never asked for that cut.

Inflation is the real game-changer, and it will work in his favour in the second half of this year. Four forces are pointing in the same direction and reinforcing one another.

The first force is the fading of the tariff shock. The reciprocal import tariffs of summer 2025 caused a one-off jump in price levels. For inflation, it is not the level of tariffs that counts, but the change in them, and that change will drop out of the year-on-year figures from the second half of this year. The base effect will work in favour of lower inflation in the coming quarters, even if the tariffs remain in place unchanged. What drove the figures up a year ago will soon be pulling them down.

The second factor is the price of oil. The geopolitical premium that arose around the Strait of Hormuz will disappear as soon as the strait reopens and diplomacy does its work. Underlying this is a structural trend: demand for oil is levelling off whilst supply from the United States, Brazil, Guyana and, soon, Suriname continues to grow. History shows that the oil price can easily halve, and a halving has an almost immediate impact on inflation figures. For a central bank, this is the most welcome form of disinflation, as it requires no action on its part.

The third factor lies in the housing component. For years, Owners’ Equivalent Rent has been the most stubborn component of US core inflation, carrying significant weight in the basket. This component lags considerably behind actual rent trends, and those trends have been normalising for some time now. If OER falls towards 2%, the main reason why core inflation has stubbornly remained above target will disappear in one fell swoop. It is a delayed effect, but one that is finally beginning to show up in the figures.

The fourth and most underestimated driver is productivity. Companies are making ever wider use of generative artificial intelligence, and this is starting to lead to measurable gains. Higher productivity means the economy can grow faster without inflation rising. It acts as a positive supply shock, comparable to electrification and the rise of the internet, both of which heralded a long period of low inflation. If productivity growth turns out to be higher than expected, Warsh will have exactly the breathing space he needs.

If one adds up these four forces, it becomes clear that inflation in the second half of the year will help rather than hinder the Fed. This creates a remarkably comfortable position for the new chairman. He can reduce the balance sheet, cut back on the number of meetings and be less involved in guiding the market, whilst at the same time lowering interest rates without compromising his credibility. Warsh thinks in terms of years, not meetings. He does not cut interest rates because the president asks him to, but because inflation allows it. The fact that the president gets what he wants in the meantime is a bonus for Warsh, but not the objective.

More columns by Han Dieperink