The new Fed Chair
As the Fed Chair Powell’s time is coming to an end in May, Trump announced that he would nominate Kevin Warsh to be the next Chairman of the Federal Reserve, an independent agency that has been under pressure from the president to lower interest rates for the last year. If confirmed, Warsh would succeed Powell, a previous Trump nominee who has incurred the president’s ire for not heeding his demands. Following the committee’s recommendation, the full Senate votes to confirm the nomination, requiring a simple majority vote.
Warsh served on the Fed Board of Governors from 2006 through 2011, where he had an opportunity to help shape the U.S. economy during one of its greatest periods of turmoil in recent history. Now a fellow at the Hoover Institution, a conservative think tank, and a lecturer at the Stanford Graduate School of Business, he also worked as an economic advisor to President George W. Bush.
Like Powell, Warsh has a J.D., not a Ph.D. in economics. Powell was the first Federal Reserve chair in 30 years to not have a doctorate in economics. Lawyers might view the world through a different cultural lens than macroeconomists do. That could influence his policy decisions. While not a macroeconomist by education, Warsh has a relatively traditional background for a Fed chair nominee, experts said. He is an academic with experience in the executive branch, as well as on the Federal Reserve Board of Governors, and is knowledgeable about financial markets. During his term as a board member, he was instrumental in helping then-Chair Ben Bernanke navigate the 2008 financial crisis. Warsh also has a history of being intellectually conservative, with an eye toward reducing government intervention in the markets.
In the past, Warsh has been hawkish on interest rates, meaning, like Powell, he was reluctant to lower them for fear of increasing inflation. But recently, he has changed his tone on the subject. In an opinion piece in The Wall Street Journal in November, Warsh argued that inflation is a choice, blamed the Fed for not moving fast enough and said the agency should lower rates. This is in line with Trump’s thinking, who is focused on getting the economy going and wants the lowest possible interest rate. On the other hand, Warsh has been relatively consistent in opposing the Fed’s policy of quantitative easing, or the large-scale buying of assets such as mortgages. The Fed currently owns more than $6.5 trillion in assets, around $4 trillion more than when Warsh left the board in 2011. Some economists, including Klein, believe the policy has been a major contributor to a too-tight housing market.
One possibility would be that Warsh will be focused on cutting interest rates, which would juice the economy, and at the same time selling assets, which would likely increase interest rates, meaning the two actions could cross-cut each other. It is worth remembering that the ultimate decision is the Board’s decision and not just the Chairman’s. The staff and the rest of the committee will have impact as well.
Gold and silver prices plummeted following news the nomination. Investors started selling off precious metals with gold falling by as much as 10%, dropping from $5,500 an ounce to around $5,136 per ounce. Meanwhile, silver nosedived by up to 20%, declining from $120 per ounce to around $103 per ounce. Starting last year, gold and silver surged to one record high after another, fueled by investor demand for hard assets amid concerns over inflation, rising government debt and political pressure on the Fed. Precious metals have been a safe haven for investors concerned that the next Fed chair would cede to Trump’s demands to cut interest rates sharply. Warsh is considered likely to maintain the Fed’s independence despite his ties to Trump and the market reacted positively to the news. He is expected to produce clear signals, few surprises, and a pragmatic approach to the delicate balance between inflation and growth.
The reasons why Trump picked Warsh are pretty straightforward. He has solid experience as a former Federal Reserve governor, he also worked in the private sector (including Morgan Stanley) and in government economic roles, which Trump’s team highlighted as evidence of competence and experience. Warsh is supportive of Trump’s preferred policy direction. Trump repeatedly criticized current Fed Chair Jerome Powell for not lowering interest rates quickly enough and has publicly said he wants a chair who supports rate cuts to stimulate growth. Warsh has more recently signaled support for lower rates, aligning him closer to Trump’s stated priorities than Powell. Also, Trump has long known Warsh. He was reportedly considered for Fed leadership before and remained on Trump’s shortlist of candidates. Some commentators suggest Trump picked Warsh because he is experienced and well-regarded enough to be taken seriously by markets and policymakers, yet more likely to pursue policies consistent with Trump’s economic agenda than Powell was.