U.S. President Donald Trump announced that he will nominate former Federal Reserve Governor Kevin Warsh as the next Chair of the U.S. Central Bank to replace Jerome Powell when Powell’s term ends in May.
This change of leadership could indicate a change in how the Federal Reserve operates according to some analysts. They believe if Warsh is confirmed it would pull the institution closer to being politically influenced and weaken its long-held independence.
Warsh previously served on the Fed from 2006 to 2011 and became the youngest governor in its history when he was appointed at age 35. Warsh is currently a fellow at the Hoover Institution, and he teaches classes at Stanford Graduate School of Business.
Trump has made many disparaging remarks regarding Powell since the President appointed Powell as the Fed Chairman back in 2017. Trump’s plan is to cut interest rates and therefore, increase the amount of money the U.S. Government can borrow to offset declining economic activity in sectors such as housing.
In a social media post, President Trump called Warsh a “great choice” and said Warsh would provide him with the interest rate cuts he asked for.
From rate hawk to friend of the policy
Before joining the board of governors of the Federal Reserve, Kevin Warsh was characterized as a” hawk” who advocated for increasing rates to control inflation. He expressed concerns about aggressive stimulus after the 2008 recession and repeatedly warned about inflation.
Recently, however, he has spoken out in favor of lower rates and in favor of President Trump’s plans to deregulate and cut spending. And through opinion pieces and interviews, he has maintained that increased fiscal discipline would help lower inflation and allow for more relaxed monetary policy.
In July, Warsh referred to the Fed’s policy framework as being “broken” for years and said that there needs to be some serious institutional reform.
Reactions from the financial markets and Congress
The market reacted cautiously to the announcement. The dollar was a little bit stronger, longer-term Treasury yields rose, and stock futures declined implying that there is uncertainty about the Fed’s future direction.
Some members of Congress also expressed concern that this nomination would threaten the independence of the Fed. Senator Elizabeth Warren stated that this is part of President Trump’s wider attempt to “take control” of the Fed. Senator Thom Tillis, a Republican, also raised concerns, saying that the political pressures being applied to the Fed are “non-negotiable.”
The Senate has to confirm Warsh’s nomination, which may potentially face disapproval by both political parties.
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Potential Obstacles Ahead
If Warsh is confirmed, he will lead a divided Federal Open Market Committee (FOMC), where members are divided between trying to control inflation and supporting slowing economic growth. As chair of the FOMC, he would have an impact, but not total control over interest rates.
Some economists have indicated if the Fed is perceived to be lowering interest rates based on politics instead of monetary policy, then this may result in investors losing confidence in U.S. Treasury securities, thus causing long-term interest rates to increase and harming the entire U.S. economy.
Warsh’s appointment by Trump is a critical point in the history of the Federal Reserve due to the current levels of U.S. Debt, the fragility of U.S. Economic Growth and Global Economic Uncertainty. The balance of political pressure against an independent central bank will have a long-lasting impact on U.S. Economic Policy Going Forward.
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