Source: The New York Times
Original Title: President Trump Wants Lower Rates. Warsh Could Have a Hard Time Delivering.
Compiled and Edited by: BitpushNews
President Trump's statement nominating Kevin M. Warsh as the next Federal Reserve Chair was filled with praise for this 55-year-old former Federal Reserve governor with deep ties to Wall Street.
Trump described him as "central casting" and predicted that Warsh would become "one of the greatest Fed chairs in history, perhaps even the best one."
However, Trump also made no secret of how high his expectations are for this most important personnel appointment. Trump wrote on Friday: "He will never let you down."
But fulfilling these expectations is no easy task.
Trump is eager to significantly lower borrowing costs and has done everything in his power to pressure the Fed into cutting rates. This pressure has even escalated into extreme confrontation—after the Justice Department launched a criminal investigation into whether Jerome H. Powell lied to Congress about the Fed headquarters renovation, the current Fed chair publicly blasted the administration.
Powell, who had long avoided responding to any of Trump's attacks, stated that the investigation was merely a pretext to coerce the Fed into cutting rates.
Late Friday, Trump again mentioned his desire for rate cuts, stating that although he did not receive an explicit commitment from Warsh regarding rate cuts, he expects Warsh to do so.
"Of course he wants to cut rates, I've been watching him for a long time," Trump said.
The path to the ultra-low interest rates Trump demands is fraught with obstacles. The economy is growing steadily and simply does not need the roughly 1% interest rate level that Trump desires. Central bank officials are well aware of this, as reflected in their nearly unanimous decision this week to keep rates unchanged in the 3.5% to 3.75% range.
Warsh's own reputation is also a major factor hindering the president's wishes. To be a credible chair, Warsh's monetary policy decisions cannot be divorced from economic data; otherwise, he risks shaking market confidence and raising doubts about the Fed's commitment to maintaining low and stable inflation.
"He will try to walk a tightrope: respecting both President Trump's wishes and the institutional process," said Dennis Lockhart, who served as president of the Atlanta Fed from 2007 to 2017 and worked with Warsh during that time. "Believe me, it will be an extremely difficult 'tap dance.' This Fed chair will need to be as graceful and precise as Fred Astaire."
Resistance to Rate Cuts
If the economy continues to perform as expected over the next year, resistance to rate cuts from within and outside the central bank could be quite fierce. If Warsh is confirmed by the Senate, he would not chair a Fed meeting until June at the earliest, meaning the backdrop could be very different by then.
But if economists' forecasts are largely accurate, with growth accelerating, the labor market stabilizing, and inflation easing only gradually, a path to rate cuts might still exist, but it would be far more gradual than the president hopes.
To change this situation, significant signs of weakness in the labor market would likely be needed—far beyond what most policymakers predict.
The Fed's interest rate decisions are voted on by the 12-member Federal Open Market Committee (FOMC), consisting of the 7 governors in Washington, the president of the New York Fed, and 4 rotating regional Fed presidents. Among this year's FOMC members, at least three regional presidents are highly skeptical of further rate cuts, including Neel T. Kashkari of the Minneapolis Fed, Lorie K. Logan of the Dallas Fed, and Beth M. Hammack of the Cleveland Fed.
Although the Fed chair holds a dominant voice in interest rate discussions and policy decisions, he or she only has one vote, meaning Warsh would have to persuade his colleagues.
For decades, Fed chairs have strived to achieve the broadest possible consensus, which is seen as key to clearly communicating policy views and effectively guiding the economy.
"You don't want to feel like you're being dragged along by someone else's policy," said James Bullard, who worked with Warsh during his tenure as president of the St. Louis Fed. Bullard, now dean of Purdue University's business school, added: "If you feel the policy is wrong—and everyone takes their duties very seriously—they will just say: 'No, I don't think this is the right policy.'"
Bullard believes that if this happens, "the chair's job will become extremely difficult."
Furthermore, if financial markets become concerned about the policies Warsh pursues, it could trigger a market rebound, leading to a rise in long-term interest rates.
"To maintain market confidence and credibility, like any Fed chair, Kevin will need to provide a solid analytical foundation based on data and economic models for his views," said University of Chicago economist Randall S. Kroszner, who served as a Fed governor alongside Warsh. "This is also the most powerful way to persuade his colleagues and influence FOMC decisions."
He's Like a "Swiss Army Knife"
Those who know Warsh say he will be adept at navigating this challenging environment while also implementing his calls for "institutional change" at the central bank.
During the protracted and highly scrutinized "interview" process for the chair position, Warsh, who nearly got the job during Trump's first term, portrayed himself as someone deeply familiar with the Fed's workings. He served as a governor for about five years and performed well during the global financial crisis. Donald Kohn, who was vice chair and worked closely with Warsh at the time, described Warsh as "very valuable" during that period.
"He can see the big picture," Kohn added. "He can gauge the prevailing sentiment and what he needs to do to lead people to follow him."
During his time at the Fed, Warsh consistently expressed concern about budding inflation and wanted the central bank to be more cautious about its crisis-fighting tools, including its decision to aggressively intervene in financial markets and buy government bonds, the so-called "quantitative easing" policy.
After leaving the Fed, Warsh maintained this view while working with billionaire investor Stanley Druckenmiller and as a senior fellow at Stanford University's Hoover Institution. Although Warsh is often labeled an "inflation hawk," he has also shown flexibility when economic conditions change. In 2018, a co-authored op-ed with Druckenmiller called for the Fed to "pause its double-barreled blitz of higher interest rates and tighter liquidity."
Recently, Warsh has argued there is room for rate cuts because if higher growth is accompanied by rising productivity—as he argues is happening now with the rise of AI—it does not necessarily lead to higher inflation. He also believes Trump's tariffs are not as inflationary as many fear. And he links rate cuts to a broader plan to reduce the Fed's influence in financial markets and shrink its $6.5 trillion balance sheet.
Druckenmiller described Warsh as a "Swiss Army knife." He said Warsh is "battle-tested" and has the financial market experience needed for the job. The Fed stopped shrinking its balance sheet last year, ending so-called "quantitative tightening" (QT). Druckenmiller said pursuing a smaller balance sheet requires fine management, and he believes Warsh can handle it well.
"He's been in the markets, he's been at the Fed, he's not stupid enough to do QT and crash the economy," Druckenmiller said. "He absolutely has that market intuition and won't act at the wrong time."
When asked how Warsh would handle potential political pressure from the president, Druckenmiller added: "He knows how to deal with people, and I think he'll handle it as well as possible." "There might not be tension because I can't rule out a scenario of high growth and low inflation. I'm open to any possibility."
Others who have known him for decades believe Warsh will not compromise his reputation to please the president, a trait for which Powell has been widely praised during his chairmanship.
"Kevin will only push for significant rate cuts if he believes they make sense," said Michael Boskin, a Hoover Institution scholar and former chairman of the Council of Economic Advisers under President George H.W. Bush. "He will form his own judgment."
This assurance is crucial at a time when the Fed institution has just weathered fierce attacks and there is deep concern about its ability to operate independently free from political interference. It also means that when Warsh eventually takes office, he will be under stricter scrutiny, with every decision analyzed for any improper influence.
"Whatever his views on interest rates, I know Kevin understands the importance of Fed independence," said former Fed governor Elizabeth A. Duke, who also worked with Warsh at the central bank. "Hopefully, with his confirmation, Kevin can get people to stop attacking the Fed's independence."
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