How will Federal Reserve Chairman Kevin Warsh navigate the expectations set by President Trump, who appointed him to reduce interest rates? The answer might lie in shifting the conversation.
This strategy seems to be a consensus among Fed analysts, including those familiar with Warsh’s approach, as they speculate on his actions following his official appointment as the head of the central bank this Friday.
Warsh’s challenge will be prominently showcased during the ceremony at the White House, where President Trump, known for replacing Jerome Powell due to Powell’s resistance to rate cuts, will oversee Warsh’s swearing-in as chairman.
Trump aims to turn this event into a grand affair, contrasting the usual subdued swearing-in ceremonies that typically occur behind the scenes at the central bank.
This unfolds amid a high-stakes political drama that has surrounded the Federal Reserve for much of the year. The president has been at odds with Powell over interest rate policies and has even prompted the Department of Justice to investigate Powell’s congressional testimonies regarding the cost of the Fed’s new headquarters.
It’s going down in the backdrop of high-stake political gamesmanship that has engulfed the Fed for the better part of the year with the president warring with Powell who defied him on rate cuts, then unleashing his DOJ to investigate statements Powell made before Congress over the cost of the agency’s new HQ.
Powell himself is breaking with tradition, choosing to stay on as a Fed governor, and likely looking to thwart Trump from pressuring the agency even with Warsh in charge.
On top of that, the conflict with Iran has led to a spike in oil prices and an inflation surge, albeit one that’s possibly temporary, but it too makes Warsh’s desire to appease Trump and cut short term rates more difficult. Indeed, traders are currently betting that a rate increase this year is more likely than a cut, even with Warsh in charge.
I have my doubts, and so do people who know Warsh, about Warsh allowing a rate hike. First, he thinks the short-term Fed Funds rate that the central bank directly controls isn’t the main driver of long-term inflation – it’s all the liquidity sloshing around in the economy when the Powell Fed continued printing money through so-called “quantitative easing” during and after the COVID lockdowns. Second, Warsh does need to be mindful of Trump.
As a result, insiders think Warsh during his first few months in the job will first seek Open Market Committee votes for a rate cut. When he finds they’re not there (I would love to be a fly-on-the-wall during his convo with Powell whom he trashed for years in various op-eds), Warsh will pivot and change the subject, as he seeks to hold rates steady.
The fresh subject, I hear, will be his broader mandate to reform the Fed’s policy making and economic research apparatus, ending any and all involvement in political endeavors such as environmental and diversity mandates that Powell flirted with over the years. Warsh also will draw attention to plans to reduce the Fed’s massive nearly $7 trillion balance sheet the central bank amassed in a bond-buying spree under Powell, which juiced inflationary pressures, he believes, by infusing liquidity into the banking system.
“He’s going to focus on reforming the institution to keep the focus off monetary policy for a while,” is how one veteran Wall Street market strategist put it.
Whether or not that will be enough to satisfy Trump is unclear. The president has offered mixed signals about Warsh and rate cuts, possibly showing he knows that his appointee faces some difficult choices with the Iran price spikes plus a divided Fed. The Donald might be willing to cut him some slack.
Or maybe not. As another Fed-watching vet put it: “Warsh doesn’t have the votes for a cut but Trump will still hammer the Fed.”
