Kevin Warsh, President Donald Trump's nominee for the next chair of the Federal Reserve, may be a pick out of "central casting," as the president says. But some economists are skeptical that he will deliver interest-rate cuts quickly, while keeping the central bank's goals of price stability and maximum employment in balance.
In the past year, labor conditions have weakened, while annual inflation has been much closer to 3% than the Fed's 2% goal. Warsh, if confirmed, will inherit this economic reality, which could make it difficult to realize Trump's vision of dramatically lower interest rates.
The challenge will come, in part, because the chair is only one of the 12 members of the Federal Open Market Committee who vote on monetary policy, including changes in interest rates. Warsh will need to build a coalition to meaningfully alter the current policy path, says Olu Sonola, U.S. head of economic research at Fitch Ratings. That may be challenging, given the current makeup of the voting members of the Fed, several of whom are seen as much more hawkish, or wary of cutting rates while inflation remains elevated.
Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack both have stressed the risks around easing rates early while inflation remains above target. Minneapolis Fed President Neel Kashkari, also voting this year, was seen as one of the committee's dovish voices, but lately has focused more on the persistence of inflation. All three voted to keep interest rates steady at the Jan. 27-28 policy meeting.
Only two FOMC members, Fed governors Christopher Waller and Stephen Miran, voted to lower interest rates at the meeting. Waller said in a statement on Friday that the economic data around labor conditions make it clear that further easing is needed. Vice Chair for Supervision Michelle Bowman, who voted with the majority to keep rates steady, is also seen as a more dovish member.
"Warsh -- like any other pick -- has an uphill climb to convince the rest of the FOMC of his vision for monetary policy, which isn't readily apparent," says Mike Skordeles, head of U.S. economics at Truist Advisory Services. "Ultimately, while the Fed chair is certainly important, many other factors are more important to economic growth."
Fed chairs aren't "all powerful," says Jonathan Pingle, chief U.S. economist at UBS. Pingle noted that the longest-serving Fed chair, William McChesney Martin Jr., won policy votes by only a single vote, while Paul Volcker once lost a policy vote.
Yet as Trump's nominee, Warsh is expected to bring a more nuanced approach to the Fed's leadership, particularly as he has expressed skepticism that the Fed is an "all-powerful, all-knowing institution," writes Jai Kedia, Cato research fellow at the Center for Monetary and Financial Alternatives. That could be a positive sign for critics who have long held that the Fed is too slow to act.
Still, Warsh's background as an inflation hawk suggests he may be in a tough spot to argue for lower rates, given that price growth has been above 2% for the past five years.
"He's a stone-cold hard money guy, who would like the Fed to do much less with its balance sheet; to significantly reduce its bond-buying, at least in normal times; and to upweight the inflation mandate relative to the employment mandate," writes Jared Bernstein, former chair of the Council of Economic Advisers under President Joe Biden.
Warsh has argued recently that artificial intelligence and deregulation could push inflation down over time, which may make his stance less clearly hawkish once on the committee, Sonola says. But again, revamping how the institution thinks about inflation may be difficult -- especially since the FOMC unanimously approved its "Statement on Longer-Run Goals and Monetary Policy Strategy" this past week.
Warsh may find his fellow committee members more receptive to his consistent advocacy for a smaller Fed balance sheet, writes Michael Feroli, chief U.S. economist at J.P. Morgan. "Some committee members have already been speaking that way; so, he wouldn't be a lone voice," Feroli says. "It might require complementary changes in implementation and regulatory policies, but those are likely doable."
Feroli is skeptical, however, that a smaller balance sheet implies lower interest rates -- an argument that Warsh has put forward previously. Rather, Feroli expects that a smaller Fed balance sheet could exert moderate upward pressure on longer-term interest rates. "This would be at odds with the administration's apparent desire to lower mortgage rates," he writes.
Warsh's fans think he can thread the needle on both policy and politics. "Kevin Warsh is well above the bar on both substance and independence to be chair of the Federal Reserve," writes Jason Furman, former chair of the Council of Economic Advisers under President Barack Obama.
"Markets remember him as a crisis-era governor with strong views on the institution's direction, and his return will help define the next phase of U.S. rate policy, balance sheet strategy, and central bank communication," writes Christian Hoffmann, head of fixed income at Thornburg Investment Management.