Kevin Warsh: Will Trump’s choice to head the US central bank give him what he wants?

Donald Trump calls for changes within the American central bank.

Now, as Jerome Powell’s term as head of the Federal Reserve ends in May, he may be on the verge of getting his wish.

On Friday, the US president announced Kevin Warsh – a conservative he had passed over for the post, much to his regret, during his first term – as his choice to replace Powell.

‘Warsh’ is ‘central casting’ and he will never let you down,” Trump said on social media in announcing his decision.

The irony of this choice was not lost on anyone. Warsh has made a name for himself as a proponent of higher interest rates — a reputation he has tried to shed in recent opinion pieces and media appearances.

It’s a position that appears to put him at odds with Trump, a self-described “low interest rate guy” who has criticized Powell for not cutting interest rates quickly enough and who has made no secret that his choice to lead the Fed should be in line with his views.

It remains to be seen whether Warsh’s selection will lead to the bank Trump wants.

Warsh brings a traditional background to the role: an Ivy League education, a prior stint at the Fed, as well as time on Wall Street and the Hoover Institution – a conservative economic think tank.

His supporters say he is sensitive to concerns about the bank’s independence and is alert to the risks if his policies serve short-term political goals rather than the economy as a whole.

Lee Ohanian, a UCLA economics professor and senior fellow at the right-wing Hoover Institution who has known Warsh for years, said following Trump’s instructions “would diminish the Fed. It would diminish the office of president and create enormous turmoil in the financial markets. Kevin knows that.”

Her appointment drew praise from establishment figures, including former Secretary of State Condoleezza Rice and Mohamed el-Erian, a high-profile economist with a long career on Wall Street.

Critics question whether it was the fact that Warsh’s father-in-law, Ronald Lauder, was a Trump donor and friend that got him the job.

Others say his record as a policymaker is poor, noting that Warsh opposed economic recovery during the 2008 financial crisis, fearing the policies would lead to inflation — a minority view then and now.

Rep. Don Beyer, a Virginia Democrat, accused Warsh of showing “his willingness to radically alter his views…based on who is in the White House.”

But overall, many players in the financial sector consider it a responsible choice.

“There appears to be at least some degree of comfort with a Warsh-led Fed relative to other choices,” Wells Fargo analysts said Friday — noting that his relatively sparse public profile in recent years implies some degree of uncertainty.

“Investors should be grateful,” Jeffrey Roach, chief economist at LPL Financial, told the BBC.

What could Warsh mean for interest rates?

Warsh’s acceptance is partly a gamble that a Fed with him in charge wouldn’t change much.

After all, despite Trump’s complaints, the Fed cut interest rates three times last year and most analysts expect additional cuts this year — regardless of what Trump thinks.

That’s good news for American borrowers, who could see lower rates on mortgages, auto loans and other types of debt — and perhaps for the president, too, if it makes people feel better about the economy.

It also means that Warsh doesn’t necessarily have to give up his credibility as an independent economist to propose lower interest rates to Trump.

“Fluctuating mission” at the Fed

Where the differences could be felt most is in other areas of the Fed, which Warsh accused of “mission creep” and assume too important a role in the economy.

He wants to reduce his role in banking regulation and reduce studies on issues such as climate change, which would put him in line with the White House.

Like Treasury Secretary Scott Bessent, he is a fierce critic of the Fed’s market interventions after the 2008 financial crisis and again during the Covid-19 pandemic, which left the bank with huge holdings of Treasuries and mortgage-backed securities.

Warsh argues that these policies prop up the stock market and other assets – benefiting the wealthy and big financial interests rather than the mainstream economy – and has called for reducing these holdings and coordinating their management more closely with the Treasury Department.

It’s unclear whether it would actually lead the Fed to reduce its balance sheet more quickly than the bank has done. This could result in higher borrowing costs – exactly the opposite of what Trump wants to see.

On Friday, gold prices fell and the dollar appreciated, suggesting traders view Warsh as likely to stick to his initial instincts as a “hawk” favoring higher interest rates.

Narayana Kocherlakota, a finance professor at the University of Rochester who worked at the Fed with Warsh, said he believed he would go against the president if conditions demanded it.

“He’s very intelligent and very independent. And I think he’s the kind of person Americans should want at the head of their central bank,” Kocherlakota said.

Others argue that Warsh’s thinking on the economy has evolved to align closely with Trump’s, notably downplaying concerns that rapid growth and rising wages could fuel inflation.

“Warsh is not the Fed guy, he is Trump’s guy, and he has followed Trump on monetary policy almost every step since 2009,” wrote Thierry Wizman, global FX and rates strategist at Macquarie Group.

For now, Warsh might emerge as the candidate most likely to satisfy all parties.

But Trump’s quick turnaround on Powell – his latest choice to lead the Fed – should serve as a reminder of caution.

Report written by Danielle Kaye, Daniel Bush and Jonathan Josephs