Warsh taps 2 Fed economists as advisers as inflation tops 4%

Federal Reserve Chairman Kevin Warsh appointed Daniel Covitz and Eric Engstrom as advisers, pulling two longtime Fed economists from research and monetary affairs to help steer policy as inflation runs at 4.1%.

"Since Epic Fury and since Warsh getting in there, I think the president's position is a lot more nuanced than 'there need to be rate cuts,'" a White House official said, speaking on condition of anonymity to describe behind-the-scenes conversations.

The appointments come as the Fed navigates a 4.1% personal consumption expenditures price index, more than double the 2% target. Core inflation, excluding food and energy, stands at 3.4%. Markets now price a 79% probability of a rate increase by December, according to CME FedWatch, with no expectation of a cut. The fed funds rate was held steady after Warsh's first meeting kept policy unchanged.

The choice of Covitz and Engstrom shows where Warsh's analytical focus lies. Both co-authored a FEDS Note on Feb. 12 analyzing the surge in far-forward nominal Treasury rates — a question that sits at the heart of current policy debates. With the next Fed meeting in late July, their research output will be closely watched as a preview of the analytical work shaping FOMC decisions.

Covitz, deputy director in the Program Direction Section of Research and Statistics, and Engstrom, associate director in the Program Direction Section of Monetary Affairs, have each spent years inside the Fed's analytical engine. Their joint February paper examined why investors are demanding higher yields on long-dated government bonds, a dynamic that, if sustained, could tighten financial conditions without the Fed moving rates.

Warsh's relationship with both economists stretches back to his tenure as a Fed governor during the 2008 financial crisis. Historical references suggest he commended their contributions as early as 2009. The appointments follow his announcement earlier this month of five task forces aimed at broad operational restructuring at the central bank.

Inflation Tests the Political Truce

The 4.1% inflation reading has shifted the political dynamics around Fed policy. President Donald Trump said as recently as Wednesday that he wants rate cuts, but his top economic advisers have stopped short of calling for near-term reductions — a departure from their stance before the Iran conflict sent energy prices surging and Warsh took the helm.

Treasury Secretary Scott Bessent said Warsh will "be independent and do what he wants," declining to say whether the Fed should cut. "Let's see what inflation looks like on the other side of the Iran conflict," Bessent said at a New York event. White House trade adviser Peter Navarro wrote that the inflation data makes a "hold-steady case" for the Fed, while Kevin Hassett, director of the National Economic Council, suggested support for a pause: "The first meeting, you want to kind of get your feet on the ground and hold steady."

The last time the Fed faced inflation above 4% with a new chairman was Paul Volcker's early tenure in 1979-1980, when the fed funds rate was pushed above 19% to break the back of double-digit price increases. While no one expects a repeat of that scale, the historical parallel shows the challenge facing Warsh: delivering price stability without triggering a recession.

What the Advisers Signal for Markets

For fixed-income investors, the Covitz-Engstrom FEDS Note on far-forward Treasury rates is the most direct signal of where the chairman's analytical gaze is focused. When the Fed chair's closest advisers are publishing research on why long-term bond yields are climbing, that topic is likely to feature prominently in forward guidance and future policy discussions.

Engstrom's specialization in inflation dynamics and macro-financial linkages suggests the Fed under Warsh will take a complete view of economic conditions, treating labor markets, asset prices, and consumer inflation as interconnected rather than separate conversations. Nearly half of Fed policymakers projected rate increases this year in their latest dot-plot projections.

The next Fed meeting is scheduled for late July. Between now and then, traders and institutional investors will track any new publications from Covitz and Engstrom. The FEDS Notes system has historically functioned as a preview channel for the analytical work that eventually shapes FOMC decisions.

This article is for informational purposes only and does not constitute investment advice.