If Federal Reserve Chairman Kevin Warsh can’t cut interest rates, how will he appease President Trump, who gave him his new job to sharpen his ax and do precisely that?
Try changing the subject.
That’s the word from Fed watchers – including those who know Warsh well – who have been mapping out what they believe he will do after officially taking over as head of the nation’s central bank on Friday.
Warsh’s predicament will be on full display on Friday at the White House, as Trump, who famously replaced Jerome Powell over the latter’s refusal to slash rates, will be presiding over Warsh’s swearing in as chairman.
Trump, of course, is seeking to make the appointment of his new Fed chair a spectacle; most Fed chair swearing-in ceremonies are hardly ceremonies, usually done behind closed doors at the central bank without much fanfare.
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.”
