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Industry Opinion
Will Kevin Warsh Follow his Predecessor or Cut Rates?
By Nironjan Roy, CPA, CMA — Certified Anti-money laundering Specialist and Banker
Kevin Warsh has become the U.S. Federal Reserve’s 17th Chairman after the Senate confirmed his nomination. President Donald Trump selected Kevin Warsh as the next Chairman of the Federal Reserve in January, which was not surprising. Because Kevin Warsh was one of the frontrunners in the selection list of Fed’s Chair in 2017, but Trump finally nominated Jerome Powell and dropped Warsh from consideration because he was too young and historically worried about inflation, so he might not have kept rates as low as Trump wanted.
Kevin Warsh, who studied at Stanford University and is a Harvard Law graduate, has been associated with Fed policy and the financial industry for most of his career. As reported in the media, Warsh has been very strategic about maintaining strong networks since his university days. In 2002, when an adviser to the Bush administration in the White House asked a professor at Stanford University to recommend a young hire, the professor immediately offered Warsh the position, strongly recommending him and calling him the most brilliant student he had ever worked with, which opened his fortune.
In 2005, when Ben Bernanke was selected as the successor to Alan Greenspan as Fed Chair, another opportunity came to Warsh, who had prepared Bernanke for the Senate confirmation hearing. After that, Warsh was appointed as a Governor of the Fed’s Board in 2006, a position he held at 35, probably the youngest Governor in the Fed.
While serving as a Governor at the Fed, Warsh played a significant role during the financial meltdown of 2008, when the Fed faced a historic challenge as a deep financial crisis threatened to plunge the economy into the worst downturn since the Great Depression. When the U.S. Financial market was in crisis for America’s largest banks and the Fed's official best-connected on Wall Street, Warsh took a leading role in coordinating the Fed’s policy response. He played a role in the government’s bailout of some financial institutions, including AIG, and encouraged JPMorgan Chase to acquire Bear Stearns, thereby helping salvage the crisis-ridden market.
Although Warsh could not secure the position of Fed Chair in 2017, he did not give up; instead, he kept his ambition high for holding the Fed’s top position. One of his activities was to strongly criticize the Fed’s Chair, Jerome Powell, a move that aligned with Trump’s position. Apart from publicly criticizing Powell, Warsh has strategically maintained close ties with President Trump, touting the president’s business agenda, which has eventually rewarded him. Over the last few years, Warsh has emerged as a strong critic of the Fed’s role, and his targets have not been limited to interest rates; he has touched on other areas as well. In 2019, he cautioned that the Fed was sowing the seeds of a bigger inflation problem by continuing to buy large quantities of treasury bonds and mortgage-backed securities. As reported in the media, Warsh has expressed his clear view against the Treasury’s holding of enormous assets. He has commented that a wholesale revamp of the Fed’s $6.6 trillion asset portfolio, which he has termed as too large and should be part of a new deal with the Treasury Department that reduces the central bank’s role in money markets.
While criticizing the Fed’s role, he has cautiously expressed his dual view, blaming both the government for interference and the Fed’s leaders for abusing the role. He has openly warned that governments would be “tempted to influence the central bank to keep monetary policy looser for longer to finance the debt.” He further stated that the Fed’s credibility demanded “fierce independence from the whims of Washington”. At the same time, he did not hesitate to blame the Fed’s previous leaders for abusing the Fed’s independence. He has openly commented that Fed leaders have used independence to shield themselves from appropriate accountability for policy missteps.
With the selection of Warsh as Fed’s new Chair, people are expecting that the rivalry between White House and the Fed, particularly between President Trump and the Fed’s Chair, will end, and Warsh may redesign monetary policy, including the benchmark rate, in line with Trump’s preference. The extent to which he would be able to do so is viewed skeptically by experts and analysts, as history does not support that possibility. Previously, whoever has held the position of Fed Chair has done the opposite.
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As reported in the media, in 1979, Paul Volcker was appointed Fed Chair, and after assuming the position, he reoriented his approach to inflation. Even the Fed’s all other successive Chairs, including long serving Allan Greenspan, have emphasized continuing their predecessors’ monetary policy. Whether Warsh will follow his predecessors or bring about some changes in monetary policy and benchmark rate remains to be seen. However, the media has reported that Warsh has a clear understanding of the Fed’s asset holdings, policy framework, role in the economy, and relationship with the executives, which may immensely help him reshape the Fed’s monetary policy and strategic approach.
However, the time for Warsh as Fed Chair is not favorable at all; uncertainty, challenges, and high expectations await him. The economy and market conditions seem to be heading towards uncertainty due to the impact of higher tariffs and the war in the Middle East. Inflation is going to heat up, and what needs to be tamed before it runs high is interest rates, which are the only applicable tool to fight inflation. If Warsh decides to hike the policy rate to combat inflation, the decision may go against President Trump’s preference, which may leave him on the same path as his predecessor, Jerome Powell, who was also Trump’s selection but finally became an antagonist of Trump because of his denial of a rate cut and keeping the rate very low as desired by President Trump. Because of the feud between the Fed’s Chair and President Trump, the Fed’s independence has come into question, so Warsh will have to be very strategic in maintaining it. Warsh has faced the toughest question about the Fed’s independence in his confirmation interview with the Senate Committee.
The Senate Committee’s confirmation vote margin suggests how tough his responsibilities will be. He has been confirmed with the narrowest margin, 54–45, in the Fed’s history since the introduction of the Senate requirement. No other Fed Chair has been confirmed with such a narrow margin. His immediate predecessor, Jerome Powell, secured at least 80 votes in the Senate for each of his two terms as Fed chair. The previous Chair, Janet Yellen, was confirmed by a 56–26 vote in 2014. With these challenges and uncertainties, whether Warsh will follow the same path as his predecessor or bring changes to monetary policy, particularly a policy rate cut, is the most discussed issue. However, his charismatic leadership, strong knowledge about the financial market, and long association with the Fed will, albeit, enable him to deliver at the desired level.
However, the time for Warsh as Fed Chair is not favorable at all; uncertainty, challenges, and high expectations await him. The economy and market conditions seem to be heading towards uncertainty due to the impact of higher tariffs and the war in the Middle East. Inflation is going to heat up, and what needs to be tamed before it runs high is interest rates, which are the only applicable tool to fight inflation. If Warsh decides to hike the policy rate to combat inflation, the decision may go against President Trump’s preference, which may leave him on the same path as his predecessor, Jerome Powell, who was also Trump’s selection but finally became an antagonist of Trump because of his denial of a rate cut and keeping the rate very low as desired by President Trump. Because of the feud between the Fed’s Chair and President Trump, the Fed’s independence has come into question, so Warsh will have to be very strategic in maintaining it. Warsh has faced the toughest question about the Fed’s independence in his confirmation interview with the Senate Committee.
The Senate Committee’s confirmation vote margin suggests how tough his responsibilities will be. He has been confirmed with the narrowest margin, 54–45, in the Fed’s history since the introduction of the Senate requirement. No other Fed Chair has been confirmed with such a narrow margin. His immediate predecessor, Jerome Powell, secured at least 80 votes in the Senate for each of his two terms as Fed chair. The previous Chair, Janet Yellen, was confirmed by a 56–26 vote in 2014. With these challenges and uncertainties, whether Warsh will follow the same path as his predecessor or bring changes to monetary policy, particularly a policy rate cut, is the most discussed issue. However, his charismatic leadership, strong knowledge about the financial market, and long association with the Fed will, albeit, enable him to deliver at the desired level.