WASHINGTON, May 18 (Reuters) - After eight years of friction with the White House, a global pandemic, and a fight with high inflation, the U.S. Federal Reserve begins a new era with former governor Kevin Warsh soon to be sworn in as chair.

It will be a new era for President Donald Trump as well. He soon will no longer have departing Fed Chair Jerome Powell as his favorite punching bag, although Powell will remain a Fed governor and will continue as central bank leader on a temporary basis until Warsh is sworn in. Warsh, Trump's pick for Fed chair, presumably brings a fresh start in relations between the Oval Office and the central bank.

In 2016, Powell was only a few months into his first term when Trump began berating him, annoyed at the Fed's interest-rate hikes. Now, Trump wants rate cuts, and Warsh may also disappoint him due to the risk of higher inflation, and the hawkish outlook of other Fed officials.

Investors at this point see Warsh having to raise rates as soon as January.

Here's where things stand at the start of the Warsh Fed:

INFLATION

Trump promised prices would fall from the start of his presidency, but inflation indexes show that has not happened. Between the lingering impact of import tariffs, the spike in oil prices during the U.S.-Israeli war on Iran and continued strong investment and spending, Warsh takes over at a time when inflation is moving further above the Fed's 2% target. Several Fed governors have expressed concern that price pressures are building.

The Powell years did see higher average inflation than his predecessors. But recently, a developing "disinflation," or slowing inflation pace, reversed course after the twin shocks of higher tariffs and rising energy costs.

UNEMPLOYMENT

Along with controlling inflation, the Fed's mission is to use policy to keep employment strong. Sometimes the two goals are in conflict. Rising prices may require the Fed to tighten policy and put job growth at risk, or high unemployment could call for lower rates which risks overheating the economy. The Fed is trying to determine if this is one of those moments of tension.

Yet so far, though inflation needs to come down, the unemployment rate has remained steady and, by historical standards, pretty low at 4.3%.

Advocates of rate cuts have argued that the labor market is weaker than it seems with real risks of a fast rise in joblessness. But lately, policymakers have expressed more worry about rising prices.

THE BALANCE SHEET

The Fed's collection of assets and liabilities is a unique economic beast. It includes the country's holdings of gold and accounts for all the physical U.S. dollars stacked in banks or stuffed in mattresses. Yet most of its current $6.7 trillion in assets and offsetting liabilities is in the form of U.S. Treasury and mortgage-backed securities that serve a dual purpose.

The large balances in effect represent Fed cash pumped into the economy in exchange for Treasury or mortgage bonds. They were accumulated to help the U.S. economy weather crises like the COVID-19 pandemic. They are being retained as part of the Fed's toolkit to manage short-term interest rates.

Warsh is expected to explore various regulatory and policy changes to shrink the large balance sheet. That could lead to a protracted discussion with limited progress in the short run. Warsh has expressed confidence about his ability to engineer broad "regime change," and Fed watchers may view the balance sheet's size as one proxy for his effectiveness.

Success will be influenced by things like how the U.S. Treasury's debt issuance schedule or international investors respond to any changes Warsh makes to bring the balance sheet down. Long-term interest rates on U.S. government debt, a factor in what consumers pay for home mortgages and other loans, have been rising already, and a smaller Fed balance sheet could add even more upward pressure.

INTEREST RATES: UP, DOWN OR SIDEWAYS?

The Fed has kept interest rates on hold since December, and policymakers generally think the current policy rate of 3.5% to 3.75% is about right. It is considered still slightly "restrictive," meaning it puts downward pressure on inflation and curbs overall demand, but not so much so that it risks a sharp jump in joblessness. Policymakers also feel the current rate could be cut quickly if needed to a level that would keep the job market steady.

Some of Warsh's colleagues are already antsy about high inflation and want to use the Fed's policy statement to signal that rate hikes, not rate cuts, may be coming.

Such a decision would be an immediate challenge for Warsh, presenting Trump with a hawkish turn in language at Warsh's very first meeting in June.

But the coming debate under the Fed's new leader will be a broad one that may take time to settle, covering things like the impact of artificial intelligence on the job market and productivity, and the ongoing evolution of a labor force constrained by an aging population and immigration levels that have plummeted under Trump.