Inflation Is a Choice

At 8:30 this morning, the Bureau of Labor Statistics reported that April inflation came in at 3.8% year over year. That is the highest reading since May 2023. It was hotter than every forecast on the Street. Energy prices are up 17.9% from a year ago. Gasoline is up 28.4%. Fuel oil is up 54.3%. The number the Fed has been trying to push down to 2% for the last five years is moving the wrong way.

At 11:30 this morning, the Senate will vote to confirm Kevin Warsh to a 14-year term on the Federal Reserve Board. By the end of this week, he is expected to be confirmed separately as Chair. Jerome Powell's term ends Friday. Powell keeps his seat as a governor, but the institution he ran for eight years changes hands at the worst possible moment for it.

The story is not just who runs the Fed. It is what Warsh thinks the Fed has been getting wrong. His diagnosis is unusual. If he means it, the next two years of US monetary policy look nothing like the last eight.

The Brief

• April CPI printed 3.8% headline, 2.8% core. Both above forecast. Core is the highest since September. ✓ BLS · 2026-05-12
• The Senate voted 49-44 on May 11 to invoke cloture on Warsh's Board nomination. A confirmation vote is set for 11:30 today. The Chair vote is expected Wednesday or Thursday. ✓ Roll Call · 2026-05-11
• Powell's term as Chair ends Friday, May 15. He confirmed on April 29 that he will remain on the Board "for a period of time to be determined." ✓ CNN · 2026-04-29
• The S&P 500 closed at a record 7,412.84 on May 11. WTI crude rose 4% to nearly $99 as Iran talks stalled. ✓ TheStreet · 2026-05-11
• The Fed currently holds about $6.6 trillion of assets. Warsh has said publicly the balance sheet needs to shrink and has floated a new Fed-Treasury accord. ✓ Hoover Institution · 2025-08-14

What Powell Leaves Behind

When Powell took the Chair in February 2018, headline CPI was 2.1%. Today it is 3.8%. Core is 2.8%. Eight years in, the gap to the 2% target is wider than it was when he started.

Powell's final FOMC meeting on April 29 ended with four dissents. That is the most disagreement on a Fed rate vote since October 1992. The decision was to hold rates at 3.5–3.75% for the third straight meeting. Markets currently price zero cuts for the rest of 2026.

The balance sheet tells a similar story. The Fed went into the pandemic with about $4.2 trillion in assets. It peaked near $9 trillion in 2022. Today it sits at $6.6 trillion. That is the QE hangover Warsh has been arguing about for fifteen years. The Fed cannot let those bonds roll off too fast without pushing long rates higher. It cannot hold them forever without becoming the de facto buyer of last resort for Treasury debt. Powell did not solve this trade-off. He managed it.

The job is being handed off in worse shape than it was received. Pandemic, Iran war, energy shock — none of those were on Powell's calendar. That is not a failure frame. It is just a description of what Warsh actually inherits on Friday.

"Inflation Is a Choice"

Warsh's most quoted line at his April 21 confirmation hearing was four words. "Inflation is a choice." That is not a slogan. It is the entire framework.

The Fed under Powell adopted "flexible average inflation targeting" in 2020. The idea: if inflation ran below 2% for a stretch, the Fed could let it run above 2% for a stretch to even out. In practice it was a permission slip to be late on tightening. Inflation then ran above target for five straight years and never came back.

Warsh wants to throw out the flexible target and go back to a strict 2%. He has said he does not care about the difference between 1.7% and 2.3% as a precision matter. He cares about whether the Fed visibly owns the number. That is what he means by "choice." Not a policy preference. A statement of who is on the hook for the outcome.

This matters in a specific way for what happens next. The Iran-driven energy shock — gasoline up 28.4% year over year, fuel oil up 54.3% — is exactly the kind of supply-side inflation flexible targeting was built to look through. Under flexible targeting, the Fed could argue energy shocks are transitory and the right response is to wait. Under a strict 2% regime, Warsh has to fight it. That fight is what shows up in your mortgage rate. The 30-year fixed averaged 6.45% as of May 11.

The Counter-Intuitive Trade

Here is the part that is not obvious. Warsh thinks shrinking the Fed's balance sheet would lower long-term interest rates, not raise them. Most market commentary assumes the opposite — less Fed buying means higher yields means higher mortgages. Warsh's argument runs the other way.

He calls the problem "monetary dominance." When the Fed buys trillions in Treasuries, it does two things at once. It pushes nominal yields down in the short run. And it signals to Congress that long-term borrowing is permanently cheap, because the central bank will absorb whatever the Treasury issues. That second effect — the signal — pushes deficits higher than they otherwise would be. Higher deficits mean more issuance. Eventually the issuance overwhelms whatever the Fed is buying. The net is higher rates, not lower ones.

The remedy he has floated is what analysts have started calling a "Reverse Operation Twist." Sell longer-dated Treasuries out of the Fed's portfolio. Buy shorter ones. The Fed's footprint shrinks at the long end of the curve — the part that prices mortgages, corporate debt, and 30-year financing. Then sign a new Fed-Treasury accord, modeled on the 1951 agreement that ended the Fed's wartime peg of Treasury yields, so the market knows the central bank is not on the hook for whatever Congress spends.

If it works, you get lower 10-year yields without cutting the federal funds rate. If it does not, you get a 2013-style taper tantrum and worse mortgage rates than 6.45%. The market has not priced either outcome because the market does not yet know which version it will get. Today's CPI print did not help — the bond market read 3.8% as a reason the new Chair will need to stay tight before he can do anything else.

Why the Vote Was Partisan

The Senate Banking Committee voted 13-11 to advance Warsh. Every Republican voted yes. Every Democrat voted no. It was the first fully partisan vote on a Fed Chair nominee in the committee's history. The cloture vote on the Senate floor last night was 49-44, on the same lines.

The Democratic objection was framed as independence. Warsh is Trump's pick. Trump has spent the last eighteen months publicly demanding rate cuts. The implication: Warsh would be a "sock puppet" delivering them. Warsh used that exact phrase at his hearing — saying he would not be one — which tells you how directly the charge was being made.

This is where the surface read gets misleading. If the White House wanted a Fed Chair who would cut and inflate, Warsh is an odd pick. He spent the last decade arguing the Fed has been too loose. He resigned from the Board in 2011 over what he saw as excessive QE. His policy on the long end is to remove Fed support, not add to it. A Warsh Fed could end up holding rates higher than markets currently expect — not for political reasons but because his framework says the Fed has not been credible enough on 2%.

The partisan vote is happening because the Democrats are voting against the appointer, not the appointee. The first ninety days of the chairmanship will tell whether that framing survives contact with the data.

The Read

EP19 said the seat was empty and markets did not know what was coming. EP24 said the cost of the AI buildout is landing on people who never bought into it. This week the question is whether the institution that prices money in America is about to operate on a different theory of what money is for.

Powell ran an asymmetric Fed. It treated low inflation as discretionary and high inflation as transitory. It treated balance sheet expansion as costless and balance sheet contraction as dangerous. It got the pandemic response right. It did not get the unwinding right. This morning's 3.8% print is the proof.

Warsh's framework is symmetric. Two percent is two percent. The balance sheet is a tool with a cost. Fiscal dominance is a problem you stop with rules, not with hope. Whether it works depends on whether he can deliver it without breaking something — and the bond market is the thing that breaks first.

Three days from now, Jerome Powell stops being the most powerful unelected official in the American economy. Kevin Warsh starts. The single biggest variable for your mortgage, your savings, and the price of everything in your shopping cart over the next four years is whether Warsh meant what he said at his confirmation hearing — and whether this morning's CPI print just forced him to mean it more. ~ Framework