Donald Trump has been calling for change at the US central bank.
Now that Jerome Powell's term as chairman of the Federal
Reserve is set to end in May, he might get what he wants.
Kevin Warsh, a conservative who the US president regretted
passing over for the position during his first term, was announced as his
choice to succeed Powell on Friday.
Trump declared on social media, "Warsh is 'central
casting,' and he will never let you down," as he made the announcement.
No one missed the irony of the choice. Warsh has made his
name as a supporter of higher interest rates - a reputation he has tried to
shed in recent opinion articles and media appearances.
He seems to be at odds with Trump, who calls himself a
"low interest rate guy." Trump has criticized Powell for not cutting
interest rates quickly enough and has made it clear that the person Trump picks
to lead the Fed should share his views.
Whether Warsh's selection will result in the bank Trump
desires remains to be seen.
Warsh has a traditional background, having attended the Ivy
League and worked at the Fed before. He also has experience working on Wall
Street and at the Hoover Institution, which is a conservative economic think
tank.
According to his supporters, he is aware of the risks if the
bank's policies serve short-term political goals rather than the economy as a
whole and is sensitive to concerns regarding the bank's independence.
According to Lee Ohanian, a senior fellow at the
right-leaning Hoover Institution and an economics professor at UCLA who has
known Warsh for a long time, following Trump's instructions "would
diminish the Fed." It would diminish the office of the chairman, and it
would create tremendous turmoil in the financial markets. That is known to Kevin.
In Congress and on Wall Street, where Trump's attacks on
Powell have caused alarm, Warsh's potential independent streak is seen as a
plus.
Establishment figures like former Secretary of State Condoleezza
Rice and Mohamed el-Erian, a well-known Wall Street economist, have praised his
nomination.
Critics have questioned whether it is the fact that Warsh's
father-in-law, Ronald Lauder, is a Trump donor and friend that got him the job.
Others say his record as a policymaker is poor, noting that
Warsh opposed economic stimulus during the 2008 financial crisis as he fretted
the policies would lead to inflation – a minority view then and now.
Congressman Don Beyer, a Democrat from Virginia, accused
Warsh of showing "willingness to wildly alter his views...based on who is
in the White House".
However, many in the financial community consider him to be a
wise choice overall.
Wells Fargo analysts stated on Friday that "there
appears to be at least some degree of comfort with a Warsh-led Fed vs. the
other choices," noting that his relatively low public profile in recent
years suggests a degree of uncertainty.
What Warsh could mean for interest rates?
The acceptance of Warsh is partially a gamble that a Fed with
him in charge might not change much
After all, the Fed cut interest rates three times last year
despite Trump's complaints, and the majority of analysts anticipate more cuts
this year, regardless of Trump's thoughts.
That's good news for US borrowers, who might see lower
interest rates on mortgages, auto loans, and other types of debt. If this makes
people feel better about the economy, it might also be good news for the
president.
It also means Warsh does not necessarily have to surrender
his credibility as an independent economist to deliver lower interest rates for
Trump.
'Mission creep' at the Fed
Differences may be more pronounced in other Fed departments,
which Warsh has accused of "mission creep" and overspending on the
economy.
Putting him in line with the White House, he wants to reduce
its role in bank regulation and reduce research on issues like climate change.
He, like Treasury Secretary Scott Bessent, is a fierce critic
of the interventions the Fed made in markets after the 2008 financial crisis
and again during the Covid-19 pandemic, which has left the bank with huge
holdings of Treasuries and mortgage-backed securities.
Warsh maintains these policies prop up the stock market and
other assets - benefiting the wealthy and big financial interests rather than
the mainstream economy - and has called for reducing those holdings and
coordinating their management more closely with the Treasury Department.
It is not clear whether he would actually prompt the Fed to
reduce its balance sheet more rapidly than the bank has been doing. This could
lead to higher borrowing costs, which is the exact opposite of what Trump
wants.
Gold prices fell on Friday and the dollar rose, indicating
that traders believe Warsh will stick to his initial instincts as a
"hawk" who favors raising interest rates
Narayana Kocherlakota, a finance professor at the University
of Rochester, who served on the Fed with Warsh, said he thinks he would go
against the president if conditions called for it.
"He's very smart and he's very independent. And I
think that's the kind of person that Americans should want at the head of their
central bank," Kocherlakota said.
Others argue Warsh's thinking on the economy has evolved to
be closely aligned with Trump, including downplaying concerns that rapid growth
and rising wages could fuel inflation.
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