Trump’s Fed chair nominee inherits divided board on rate cuts

WASHINGTON (TNND) — President Donald Trump has named his nominee to replace Federal Reserve chair Jerome Powell once his term expires in May, selecting former Fed governor Kevin Warsh to lead the central bank through economic uncertainties creating a challenging dynamic to set policy also under pressure from the White House.

Warsh will have to gain the trust of Fed officials whose votes he will need to set monetary policy while keeping financial market’s faith in the U.S. central bank to act free of political influence and navigating the demands of a president who has not been shy about weighing in on rate decisions.

Trump has advocated aggressively for the Fed to cut rates since returning to office to spur more economic growth and to lower interest rates for mortgages as his administration tries to make homeownership more affordable. He has repeatedly railed against Powell, who he first nominated to the position in 2018, for failing to deliver more aggressive rate cuts.

The president has continued to advocate for his desire for lower rates and expected Warsh to deliver, though Trump said Warsh did not give him a commitment to it.

“I want to keep it nice and pure,” Trump said. “But he certainly wants to cut rates. I’ve been watching him for a long time.”

Warsh was considered the most hawkish of the finalists to be the next chair and a record of prioritizing inflation, including during his time on the board during the financial crisis when he was serving as a Fed governor, but has recently advocated for cuts because artificial intelligence and growing productivity are creating an environment for robust growth without risking price hikes. He has also advocated for the Fed to have a smaller footprint in the U.S. economy, arguing it should massively reduce its huge balance sheet to give officials more room to cut rates.

If Warsh is confirmed, he will be put in charge of a board that is hesitant to keep cutting rates over fears of inflation moving back upward. The current version of the FOMC only has one more cut penciled in this year, though other forecasters are expecting up to two.

Officials left rates at a range of 3.5% to 3.75% after their meeting earlier this month in a nearly unanimous decision with two dissents for a quarter-point cut. The remainder of the board appear unlikely to change their stance with the economy growing steadily and inflation hovering near 3%. Most officials have said they believe their policy stance is at or nearing neutral, where rates do not increase or suppress economic activity.

Warsh would not preside over a Fed meeting until June if his nomination were approved by the Senate, leaving plenty of time for the economic dynamics to change. But most forecasts are calling for economic growth to continue, the labor market to stabilize and slow-moving progress on getting inflation to 2%, a combination that does not provide a path to slashing rates to 1% like the president has called for.

Officials may be persuaded if more employers go forward with layoffs and the unemployment rate continues to climb, a scenario that policymakers do not see as likely. Stalled job creation and a climb in unemployment last year pushed officials to cut by a total of 0.75% over three consecutive meetings.

That comes as inflation is still above the Fed’s 2% target, where it has been stuck for more than four years. Most of the FOMC is more concerned about getting it back to target while dovish members are prioritizing the upticks in unemployment.

In the initial trading period after the announcement of Warsh, markets reacted as if rates would be higher over time in an early signal of how traders are viewing his positions and confidence in independence from the White House. Wall Street could derail rate cuts from the Fed if it views them as happening too aggressively or for political reasons by selling Treasury bonds, which would push up longer-term interest rates.

“Inflation numbers themselves are still 2.7%, well over the target, so I don’t see him totally ignoring inflation with a focus on just reducing rates,” said Mark Williams, a finance lecturer at Boston University’s Questrom School of Business and former bank examiner at the Fed.

“The markets won’t respond favorably if Warsh just cuts rates with inflation at its current high levels,” he added.

Even if Warsh is a forceful advocate for cutting rates, there’s no guarantee he can convince the other 12 members of the committee to back that push. The chair only receives one vote and can sway the debate amongst the committee to steer policy decisions, but still has to convince other officials to back any decision.

Fed chairs have tried to steer committee decisions toward as much consensus in possible over the last several decades to clearly communicate its policy stance and navigate the economy efficiently. The 9-3 vote in December to cut by a quarter-point had the most dissenting votes in six years.

“Warsh should be able to gain greater consensus because of his previous work experience at the Fed and his understanding of the various tools and methods that are used for monetary policy,” Williams said. “He gains a lot of respect.”

The pressure on the Fed, including an investigation into Powell for renovation at the Fed’s headquarters and an attempt to fire governor Lisa Cook being deliberated by the Supreme Court, have raised questions about the central bank’s independence to act based on economic data and not political whims.