What will Kevin Warsh, Trump’s nominee to be the next Fed chair, mean for interest rates?
The muted market reaction to the announcement of his candidacy suggests that he is not simply Trump’s stooge, drafted in to do his master’s bidding (lower interest rates quicker than the current office holder, Jerome Powell).
Trump’s attempts to break the Fed’s independence (he has continually attacked Powell for not reducing interest rates fast enough) have previously played negatively with markets.
By the same token, Warsh, traditionally a monetary hawk in favour of higher interest rates, has seemingly all of a sudden changed his tune on rates, calling for faster cuts, music to Trump’s ears.
He claims that artificial intelligence (AI) will trigger “the most productivity-enhancing wave of our lifetimes – past, present and future”. Said another way, he believes the AI revolution will trigger a disinflationary shock, creating space for easier monetary policy.
Surprise, surprise, this is not a view shared by all economists. Some believe the AI boom will have a negligible impact on prices, at least in the short term, while others think the demand for new technologies will inflate prices.
So has Warsh simply changed tack on rates to curry favour with Trump and land the Fed job?
Is it time Ireland abolished mandatory retirement?
That’s the accusation from cynics and he wouldn’t be the first political, business or financial leader in the US to go into reverse in the current climate.
Warsh has maintained a criticism of the Fed’s asset purchasing programmes after the 2008 crash and more recently during the pandemic, which he believes supported stock markets and asset prices without benefiting the real economy much.
He believes the Fed should be less interventionist and should rapidly shrink its balance sheet, which he has described as “bloated”.
But it is whether he will maintain Powell’s softly, softly stance on rates, particularly with tariffs inflating prices, or change the bank’s stance, in Trump’s favour, that remains the big question.
Warsh will be questioned about his approach in US Senate confirmation hearings that will be scheduled sometime before May 22nd, when Powell’s term as central bank chief ends. We might then get an insight into his plans for the Fed on his watch.
