Kevin Warsh, the new U.S. Federal Reserve Chair, testifies during a Senate Banking Committee hearing on his nomination on Capitol Hill in Washington, D.C., on April 21.MANDEL NGAN/AFP/Getty Images
Chris Gay is a contributing columnist for The Globe and Mail. He is a former Wall Street Journal staffer and writes the newsletter Figure at Center.
U.S. meddler-in-chief Donald Trump has hijacked authority over everything, from Kennedy Center programming to White House renovations. Markets are about to find out whether he’d do something similar, and unprecedented, at the world’s most important monetary authority via Kevin Warsh, whom the Senate confirmed on Wednesday as Federal Reserve chair.
The problem here is Mr. Trump’s well-known penchant for installing loyalists in high places, which doesn’t quite square with Mr. Warsh’s declared intention to insulate Fed policy-making from political intrusion. Given Mr. Trump’s preference for hiring sycophants, his open desire for lower interest rates and Mr. Warsh’s eagerness for the job, Fed independence could take a hit. If Mr. Trump knows anything, it’s how to leverage careerist ambitions into slavish loyalty.
U.S. Senate confirms Trump pick Kevin Warsh as Federal Reserve chair
He’s already gone to work on Mr. Warsh, confirming a December Wall Street Journal report that he’d “pressed Warsh on whether he could trust him to support interest-rate cuts if he were chosen to lead the central bank.” Mr. Trump told the Journal that the next Fed chair should consult with the President when setting rates, and that Mr. Warsh “thinks you have to lower” them.
Mr. Warsh told the Senate Banking Committee in April that Mr. Trump “never once asked me to commit to any particular interest-rate decision, period, and nor would I ever agree to do so if he had, but he never did.”
He didn’t sound very independent, though, when he refused to concede at the hearing that Mr. Trump lost the 2020 election, and when he declined to criticize Trump’s contested attempt to fire Fed board member Lisa Cook on spurious charges of mortgage fraud. Outgoing Fed chair Jerome Powell has criticized the case as an attempt to compromise Fed independence. In fact, he will remain a board member – the first time an outgoing chairman has done so since 1948 – indicating his own fears for Fed autonomy.
U.S. Federal Reserve chief nominee Kevin Warsh told U.S. senators in April he would make monetary policy decisions independent of any advice or pressure from President Donald Trump.
Reuters
What worries many is Mr. Warsh’s ambiguous record on rates (even though the chair is only one vote on the Fed’s rating-setting panel). As a Fed governor, he objected to the rock-bottom rates kept in place for years after the 2008-2009 financial crisis that prompted them. He appears less hawkish now, even with inflation well above the Fed’s 2-per-cent target, arguing that a gradual reduction of the Fed’s nearly US$7-trillion balance sheet, a revised measure of inflation and AI-driven productivity gains would help make room for cuts.
The balance sheet is just one area where Mr. Warsh plans big changes. Broadly speaking, he wants what he calls “regime change” in order to keep the Fed in what he regards as its proper lane. He also wants to de-emphasize “forward guidance,” the cryptic, often market-moving public hints about where Fed policy might be headed, and would prefer “messier” policy meetings, saying that less unanimity and more disagreement among members of the Federal Open Market Committee would enhance Fed credibility.
Not everyone is impressed. “He is very good at saying things that sound thoughtful and impressive, but he is also, and it’s really very clear, a partisan hack,” said economist Paul Krugman last month on his popular podcast. “He’s for tight money when a Democrat is in the White House and for easy money when there’s a Republican.”
Who is Trump’s Federal Reserve chair nominee Kevin Warsh?
It’s understandable that Mr. Warsh walked a fine line during his contentious confirmation hearing. He may have been worried that a jilted Mr. Trump could pull his nomination before confirmation. While this would have been “an unprecedented use of the president’s appointment power,” it would not have been out of character, Andrea Katz, a professor of constitutional law at Washington University in St. Louis, wrote in an email. “He’s already defied ordinary norms when it comes to candidate qualifications.”
Mr. Warsh may yet be concerned that if the Cook case – now under Supreme Court review – goes Mr. Trump’s way, he’ll have authority to threaten him as chairman.
Mr. Trump seems to have little appreciation for, or maybe understanding of, the Fed’s essentially technocratic role. It’s not supposed to cater to the needs of politicians. It’s supposed to “lean against the wind,” calibrating policy to resist inflationary pressures from one side and deflationary pressures from the other. All the while it must be cognizant of its “dual mandate” – sustaining stable prices and maximal employment.
That’s a hard job under any circumstances, to say nothing of one that Mr. Trump himself has unnecessarily complicated with inflationary tariffs and a reckless war in the Middle East. Mr. Warsh’s first job, then, will be convincing markets that he’s his own man, one willing to heed the data, not the Donald.