In the last seven weeks, the stock market has had its ups and downs, creating quite the experience for investors. The Dow Jones Industrial Average (^DJI +1.79%) and the Nasdaq Composite (^IXIC +1.52%) both briefly entered correction territory, while the S&P 500 (^GSPC +1.20%) is close behind. Interestingly, we’ve observed some intense rallies that have helped erase many losses in just a couple of weeks.
While it’s easy to feel optimistic with Wall Street’s recent bounce back, some analysts think these gains could be short-lived.
Historically, nothing is certain, but Wall Street is gearing up for a potential challenging situation as May 15th approaches, largely due to significant shifts at the Federal Reserve.
The Kevin Warsh era is expected to begin within four weeks
Marking May 15th as a pivotal day, it’s also the conclusion of Federal Reserve Chairman Jerome Powell’s second term. It’s no surprise given the tension between President Trump and Mr. Powell surrounding interest rates; the president has chosen not to nominate Powell for a third term.
On January 30, President Trump designated Kevin Warsh to take Powell’s place as Chairman of the Federal Reserve. If confirmed by the Senate, Warsh would become the 17th chairman, equipped with some noteworthy experience.
Warsh served on the Board of Governors from 2006 until 2011 and was also part of the voting members on the Federal Open Market Committee (FOMC), which plays a major role in shaping the country’s monetary policy.
Having contributed to the response during the financial crisis, Warsh’s previous votes and criticisms of the Federal Reserve’s actions are causing some unease among investors.
“If Trump wanted someone to be tolerant of inflation, he chose the wrong person in Kevin Warsh.”@AnnaEconomist pic.twitter.com/FGMfeSqHpU
For instance, Warsh’s previous votes suggest he prioritized one aspect of the Fed’s dual mission—price stability—over another, which is to maximize employment. Even when unemployment was high during the Great Recession, he preferred raising interest rates to prevent inflation from rising too quickly.
This tendency has led many to label him a “hawk,” especially in the context of Trump’s pressure on Powell and the FOMC to cut rates aggressively.
Moreover, Warsh’s inclination to reduce the size of the central bank’s balance sheet has raised eyebrows.
Since August 2008, the Fed’s balance sheet has grown tremendously, from below $900 billion to nearly $9 trillion by April 2022. While the quantitative tightening process has diminished this amount to around $6.7 trillion as of April 8, 2026, Warsh aims for the Fed to take a more passive role, suggesting the sale of considerable assets.
This approach could lead to a sharp decline in bond prices and a rise in yields, thereby raising borrowing costs.
Warsh’s rise may coincide with a period of volatility in the stock market
It’s important to note that Warsh’s record and perspective on the balance sheet represent just part of the bigger picture.
As a new Fed chair is poised to step in, inflation rates in the U.S. are surging partly due to Trump’s actions in Iran.
On February 28, President Trump ordered military action against Iran, which subsequently affected oil exports through the Strait of Hormuz. This disruption is notable as the Strait sees about 20% of the world’s oil supply. The seven-week interruption has significantly impacted energy markets, driving oil prices up and causing the fastest rise in gasoline costs in over three decades.
Price changes from last year (March CPI report)
Fuel oil: +44.2%
Gasoline: +18.9%
Gas business: +6.4%
Power: +4.6%
Transportation: +4.1%
Meals outside of home: +3.8%
Medical: +3.7%
Overall CPI: +3.3%
Shelter: +3%
Meals at home: +1.9%
New car: +0.5%
Used cars: -3.2%
The 12-month inflation rate in the U.S. climbed by 90 basis points to 3.3% in March, partly fueled by rising energy prices and ongoing tariffs imposed by President Trump. This inflation rate has notably surpassed the Fed’s long-term goal of 2% for five consecutive years.
Unfortunately, spikes in energy prices often linger, and estimates suggest TTM inflation could rise to 3.58% in April, based on the Cleveland Fed’s tool for inflation forecasting.
At the start of the year, with markets experiencing their second-highest valuations since 1871, there was a prevailing belief that the FOMC might lower rates. However, the uptick in TTM inflation—up from 2.4% in February to an estimated 3.58% in April—throws that expectation into question. In fact, there’s now a strong possibility that the FOMC could increase rates before the year wraps up.
So, connecting the pieces here, as Kevin Warsh—typically seen as a hawk—prepares to assume the role of Fed chairman, a rise in inflation coincides with an expensive stock market. This situation could lead to tricky times around May 15th.
