Financier №3 (43) 2026

Kevin Warsh took over as head of the US Federal Reserve in May 2026, at a time when the conflict over Iran triggered a classic oil shock. That month, Brent crude reached $115 per barrel, and annual inflation surged to 4.2%. 

By the end of June, the situation had eased: a truce and signs of restored shipping through the Strait of Hormuz helped inflation recede to 3.5%. However, the regional situation remains uncertain, weighing on the global economy. It is under these conditions that Warsh must build his reputation as head of the US central bank. What lessons from past oil crises can he draw on, and what policy might he pursue? This article explores these questions.

How Oil Becomes an Inflation Driver

The mechanism is straightforward: fuel prices rise first, which then affects the cost of transportation, production, and delivery of goods. Next, psychology kicks in: if inflation remains high for an extended period, consumers and businesses start expecting further price increases and proactively raise the prices of goods and services. This makes it harder to bring inflation under control (for more details, see pp. 30–31).

Lessons from History

Arthur Burns faced an economic shock while leading the Fed in 1973. Following the oil embargo (see pp. 6–7), the Fed hesitated to raise rates sharply amid a weak economy; as a result, inflation hit 11% by 1974.

Paul Volcker inherited a sharp price spike in 1979 and acted decisively: he raised the rate to nearly 20 %, which triggered a recession but helped curb expectations of high inflation.

Alan Greenspan adopted a more cautious approach during the 1990 Gulf War: the economy was already struggling due to widespread financial sector bankruptcies, even without the oil factor, so the Fed gradually softened the blow.

Jerome Powell encountered the 2022 oil shock at a time when rates were already being raised: the Fed was fighting high inflation in the aftermath of the pandemic. Consequently, the regulator continued tightening monetary policy.

Post‑pandemic inflation in the US reached its highest level in nearly 40 years: 9.1%

Warsh’s Policy

Warsh’s rhetoric is tougher than one might expect from a “dovish” policymaker*, as he was labelled before his appointment. In July, he described prices as too high. While the official FOMC statement attributes inflation in part to “supply shocks,” including in the energy sector, Warsh clarifies that the Committee does not intend to simply ignore these shocks; rather, it seeks to understand whether rising energy prices are spilling over into other goods and services.

*A proponent of loose monetary policy: generally in favor of lower rates or opposed to rate hikes

There is also a second front that Warsh is keeping in mind alongside the rate - the reduction of the Fed’s balance sheet. Even before his appointment, he advocated for reducing liquidity in the financial system. In his view, this helps contain inflation, although excessively rapid contraction could pose problems for the financial market.

Although his stance on the Fed’s balance sheet has been consistently hawkish, the market had expected a softer approach on rates. In practice, he is holding off and does not rule out a rate hike if price growth spreads from energy to other goods and services and becomes persistent. This positions him as a watchful “hawk” - a proponent of tight monetary policy to combat inflation.

What Next?

According to CME FedWatch**, the market expects a 25 basis point rate hike by the Fed in October. The probability of a rate adjustment as early as September is estimated at approximately 48%.

**A CME Group tool showing market expectations for the Fed’s rate

At the same time, if geopolitical tensions ease, inflationary pressure could subside as quickly as it emerged. Warsh himself avoids making forecasts but signals that the Fed will not treat rising prices as merely a “temporary external shock” and will not delay its response if inflation starts to take hold across other categories.