Interest rate cuts? Trump's "perfect candidate" might be harder to deal with than Powell!

Source: The New York Times

Original Title: President Trump Wants Lower Rates. Warsh Could Have a Hard Time Delivering.

Translation and Editing: BitpushNews

In the statement nominating Kevin M. Warsh as the next Federal Reserve Chair, President Trump’s praise for the 55-year-old former Fed governor with deep Wall Street ties is evident.

Trump described him as a “born star” (central casting), and predicted that Warsh would become “one of the greatest Federal Reserve Chairs in history, and perhaps the most outstanding one.”

However, Trump also openly expressed high expectations for this critical appointment. On Friday, Trump wrote: “He will never let you down.”

But achieving these expectations will not be easy.

Trump is eager to significantly lower borrowing costs and has exerted maximum pressure on the Fed to cut rates. This pressure has even escalated into extreme confrontation—after the Justice Department launched a criminal investigation into whether the Fed lied to Congress about the renovation of its headquarters, current Fed Chair Jerome H. Powell publicly criticized the government.

Long-standing silence in response to Trump’s attacks has been broken by Powell, who called the investigation merely an excuse aimed at coercing the Fed into rate cuts.

Last Friday evening, Trump reiterated his desire for rate cuts, stating that, although he has not received a clear commitment from Warsh on lowering rates, he expects him to do so.

“He certainly wants to cut rates, I’ve watched him for a long time,” Trump said.

The path to the ultra-low interest rates Trump demands is fraught with obstacles. If the economy continues to grow steadily, there is little need for the Fed to hit the roughly 1% rate level Trump hopes for. Central bank officials are well aware of this, as reflected in their nearly unanimous decision this week to keep rates in the 3.5% to 3.75% range.

Warsh’s own reputation is also a significant barrier to the president’s wishes. To be a credible chair, Warsh’s monetary policy decisions must be data-driven; otherwise, he risks shaking market confidence and undermining the Fed’s commitment to low and stable inflation.

“He will try to walk a tightrope: respecting President Trump’s wishes while adhering to institutional procedures,” said Dennis Lockhart, who served as Atlanta Fed President from 2007 to 2017 and worked closely with Warsh. “Believe me, this will be an extremely difficult ‘tap dance.’ The Fed Chair must be as graceful and precise as Fred Astaire.”

Resistance to Rate Cuts

If the economy continues on its current trajectory over the next year, resistance to rate cuts from within and outside the central bank could be quite intense. If Warsh is confirmed by the Senate, he might not preside over a Fed meeting until June, meaning the background could be very different by then.

But if economists’ forecasts are broadly accurate, economic growth will accelerate, the labor market will stabilize, and inflation will gradually ease. In such an environment, rate cuts could still be possible, but much more gradual than the president desires.

To change this situation, there may need to be significant signs of weakness in the labor market—far beyond what most policymakers expect.

The Fed’s rate decisions are made by the 12 members of the Federal Open Market Committee (FOMC). The committee includes seven Washington-based governors, the New York Fed President, and four rotating regional Fed Presidents. Among this year’s FOMC members, at least three regional presidents are highly skeptical of further rate cuts, including Neel T. Kashkari of Minneapolis, Lorie K. Logan of Dallas, and Beth M. Hammack of Cleveland.

While the Fed Chair has dominant influence over rate discussions and policy decisions, they only have one vote, meaning Warsh must persuade his colleagues.

In recent decades, Fed Chairs have worked hard to achieve maximum consensus, which is considered key to clearly communicating policy views and effectively guiding the economy.

“You don’t want to feel like you’re being dragged along by someone else’s policy,” said James Bullard, who worked with Warsh during his tenure as St. Louis Fed President. Bullard is now Dean of the Purdue University Krannert School of Management, and added, “If you think the policy is wrong—and everyone takes their responsibilities very seriously—they will directly say: ‘No, I don’t think this is the right policy.’”

Bullard believes that if such a situation arises, “the chairman’s job will become very difficult.”

Additionally, if financial markets become worried about Warsh’s policy pursuits, it could trigger market rebounds and lead to a rise in long-term interest rates.

“To maintain market confidence and credibility, like any Fed Chair, Kevin needs to provide a solid analysis based on data and economic models,” said Randall S. Kroszner, an economist at the University of Chicago who served as a Fed Governor alongside Warsh. “That’s also the most effective way to persuade colleagues and influence FOMC decisions.”

He’s Like a “Swiss Army Knife”

People who know Warsh say he will be adept at handling this challenging environment, while also implementing his calls for “institutional reform” at the central bank.

During the prolonged and highly scrutinized “interview” process for the chairmanship, Warsh, who nearly secured the position during Trump’s first term, has positioned himself as someone deeply familiar with the Fed’s workings. He served as a governor for about five years and performed well during the global financial crisis. Donald Kohn, who was Vice Chair and worked closely with Warsh at that time, said Warsh was “very valuable” during that period.

“He has a broad perspective,” Kohn added. “He can gauge the overall sentiment and knows what he needs to do to guide everyone.”

During his time at the Fed, Warsh was consistently concerned about emerging inflation and advocated for more cautious use of the central bank’s crisis response tools, including the so-called “quantitative easing” (QE) policy of heavily intervening in financial markets and purchasing government bonds.

After leaving the Fed, Warsh maintained this view through his work with billionaire investor Stanley Druckenmiller and as a senior fellow at Stanford University’s Hoover Institution. Although often labeled as an “inflation hawk,” he has shown flexibility when economic conditions change. In 2018, he co-authored a commentary with Druckenmiller calling for the Fed to “pause rate hikes and tighten liquidity in a dual approach.”

Recently, Warsh has believed there is room for rate cuts because, if higher growth is accompanied by productivity gains—as he advocates with the current rise of artificial intelligence—it does not necessarily lead to inflation. He also believes that Trump’s tariffs are not as inflationary as many fear. He links rate cuts to a broader plan to reduce the Fed’s influence in financial markets and shrink its $6.5 trillion balance sheet.

Druckenmiller describes Warsh as a “Swiss Army Knife.” He said Warsh has “been through tough tests” and possesses the financial market experience needed for the job. The Fed stopped shrinking its balance sheet last year, ending the so-called “quantitative tightening” (QT). Druckenmiller said pursuing a smaller balance sheet requires fine management, and he believes Warsh can handle it well.

“He’s active in markets, has worked at the Fed, and wouldn’t be foolish enough to pursue QT and trigger an economic collapse,” Druckenmiller said. “He definitely has that market intuition and wouldn’t act at the wrong time.”

When asked how Warsh might handle the political pressure from the president, Druckenmiller added, “He knows how to deal with people, and I think he will handle it as well as he can.” “There might not be tension, because I can’t rule out scenarios of high growth and low inflation. I am open to any possibility.”

Others who have known him for decades believe Warsh will not sacrifice his reputation to “please the president,” which is also a point of praise for Powell during his tenure as Chair.

“Only if he believes a significant rate cut makes sense will Kevin push for it,” said Michael Boskin, a Hoover Institution scholar and former chair of the Council of Economic Advisers under President George H. W. Bush. “He will form his own judgment.”

This reassurance is especially important after last year’s intense attacks on the Fed’s independence and widespread concerns about whether the Fed can operate free from political interference. It also means that when Warsh finally takes office, he will be under close scrutiny, and every decision will be carefully analyzed for potential undue influence.

“No matter what his views on rates are, I know Kevin understands the importance of Fed independence,” said Elizabeth A. Duke, a former Fed Governor who also worked with Warsh. “I hope that with his confirmation, Kevin can help stop the attacks on Fed independence.”