Trump taps Warsh, a Fed insider and outsider, to lead central bank
Faced with the fall of the dollar and the surge in gold prices, President Donald Trump intervened on Friday to calm global markets. He appointed Kevin Warsh as head of the Federal Reserve, the American central bank.
This is a key event closely followed around the world. For the markets, at least, this decision worked. The dollar rebounded and gold fell 8% to less than $5,000 on Friday.
The choice of Fed chair is important because of the outsized role he plays in setting Fed policy, from overseeing banks to setting the nation’s interest rates. As the world’s most powerful central bank, its interest rate decisions ripple around the world. Mr. Warsh could also steer the Fed on a new path.
Why we wrote this
President Trump’s nomination of Kevin Warsh to head the Federal Reserve has calmed markets, but the former governor could also steer the Fed on a new path.
Traders sighed with relief as Mr. Warsh, a former Fed governor, is seen as more likely to withstand presidential pressure than Mr. Trump’s other potential nominees, such as top presidential adviser Kevin Hassett, once considered the front-runner for the Fed job.
“Kevin Warsh is not as malleable as Kevin Hassett,” says Jeffrey Sonnenfeld, president of the Chief Executive Leadership Institute at Yale University and author of a forthcoming book, “Trump’s Ten Commandments.”
A question of independence and influence
In some ways, Mr. Warsh represents an odd choice for Mr. Trump. For months, the president has publicly pressured the Fed to cut interest rates more quickly to spur growth. Mr. Warsh, often called an “inflation hawk,” has historically criticized such efforts, preferring to ensure that inflation remains under control by keeping rates high.
In a 2010 speech when he was Fed governor, Warsh emphasized the importance of the central bank’s independence from political influence.
In other ways, however, Mr. Warsh, a New Yorker who graduated from Stanford University and then Harvard Law School, represents the kind of maverick outsider Mr. Trump might appreciate at the Fed. For example, he recently claimed that interest rates could fall further if his major Fed reforms are implemented.
He is also skeptical of institutional overreach.
A criticism of certain Fed measures
As governor during the 2008-09 financial crisis, for example, Mr. Warsh became a valuable aide to then-Fed Chairman Ben Bernanke, who took bold and unconventional steps to keep the nation’s banks from collapsing.
But he has become increasingly critical of these measures, particularly the Fed’s large-scale purchases of debt from the federal government and federal agencies, known as quantitative easing (QE). A few months after the Fed announced a second round of purchases, known as QE2, Mr. Warsh left the Fed, having served less than half of his 14-year term.
The central bank has been slow to reduce its federal debt portfolio. According to Mr. Warsh, these stakes distort the market and should be radically reduced. A key example is his skepticism in 2010 toward the second round of quantitative easing, where, while still Fed governor, he warned that large-scale bond purchases risked market distortions.
He also criticized a much newer policy, called Reserve Management Purchases (RMP), under which the Fed also purchases federal debt. The central bank claims it is designed to manage liquidity in the financial system, but critics say it also serves as QE.
According to Mr. Warsh, all this liquidity is excessively stimulating the economy. If the Fed were to reduce its massive federal debt portfolio, these stimulus measures would diminish. This would allow the central bank to cut interest rates without triggering inflation.
Central bank policy “has been broken for quite a long time,” he said last year. He criticized current President Jerome Powell for letting inflation soar in 2021-22, calling it “the biggest macroeconomic policy mistake in 45 years.”
Mr. Powell’s term ends in May. Mr. Warsh, if approved by the Senate, will succeed him.
Senatorial refusal
The Republican majority would generally make confirmation an issue. But President Trump’s pressure tactics against Mr. Powell, including a Justice Department investigation into Mr. Powell himself, have angered many senators, including Republican Thom Tillis of North Carolina. As a member of the Fed Nominating Committee, he pledged to oppose any Fed confirmations until the Powell investigation is complete.
If confirmed, Mr. Warsh could face even tougher opposition in the Federal Open Market Committee, the Fed body that sets interest rates. His criticisms have been harsh and his opinions are in the minority.
“We think it will be difficult for Warsh to get the FOMC to buy into his policy agenda,” Bank of America analysts wrote in a note on Friday.
