Donald Trump’s selection of Kevin Warsh as the nominee to chair the Federal Reserve comes after a high-profile contest to take the most important job in economics and markets outside elected office.
Subject to confirmation by the US Senate, Warsh will succeed Jay Powell when his term ends in May. Here are the initial views of economic and financial commentators at the Financial Times on the choice of the 55-year-old for the job.
Martin Wolf, Chief Economics Commentator
On paper, Kevin Warsh is a far more qualified candidate to be chair of the Federal Reserve than a number of others whose names have been circulated. He was a Fed governor from 2006 to 2011. He has also had extensive experience in markets and in government.
As a governor, he was an outspoken inflation hawk, notably in a speech he delivered to the Shadow Open Markets Committee in March 2010. He was also a critic of the enlargement of the Fed’s balance sheet during the 2010s. While defending the Fed’s independence in monetary policy, he stressed that comparable deference was not owed to the Fed’s views “in the conduct of regulatory policy, consumer protection, or other responsibilities”.
Why then has President Donald Trump chosen as Fed chair someone who was an inflation hawk even when there was no plausible inflation pressure? What might be the consequences of having a Fed chair who might be reluctant to assert the Fed’s views forcefully upon regulatory questions? Finally, are his judgments ultimately political, as Paul Krugman has suggested, or are they rooted, instead, in a fierce commitment to sound money and free markets? If the latter, there could be fierce rows between the president and his appointee.
Katie Martin, Markets Columnist
The problem with nominating Warsh is that, from a markets perspective, the damage is done. Yes, he’s one of the more serious candidates for the role. He comes with a reputation for taking inflation seriously and is likely to be more willing than some other candidates to keep interest rates relatively high in the event of a break higher in inflation. In theory, this should help to keep a lid on borrowing costs, and it might help stabilise the dollar after a rocky start to the year.
But how does that square with a US president who has made very clear he wants interest rates to be sharply lower? The attempted ousting of governor Lisa Cook, the constant calls for Powell’s defenestration, the appointment of ally Stephen Miran to the Fed board and the legal threats against the current chair all suggest the pressure on Warsh will remain.
Investors will not forget this recent history. Trust and credibility in the Fed have been damaged.
Alan Beattie, Senior Trade Writer
Warsh is on the sensible, technocratic end of the Trump-acceptable spectrum, and the markets have reacted accordingly. It’s not entirely impossible to imagine him ending up like Powell — a Trump appointment initially arousing concern about his independence but ending up defending the Fed’s autonomy. The same happened even with Alan Greenspan, the most powerful Fed chair of modern times, who was appointed by Ronald Reagan as a Republican Party loyalist but rapidly asserted his independence. Greenspan was blamed by George HW Bush for losing the 1992 presidential election by not cutting rates fast enough.
But Trump is not Reagan or Bush; he has zero respect for Fed independence and he plays dirty. Warsh’s tenure will depend on just how much pressure Trump wants to put him under and how much he wants to and can resist. His future lies in the realm of personality and power politics, not his views as an economist.
Robin Wigglesworth, Editor of Alphaville
Kevin Warsh isn’t the worst candidate that president Trump could have picked, but that says more about the initial longlist of people that were floated for the Federal Reserve chair than the qualities of the nominee.
The reality is that he is an underwhelming candidate to lead the world’s most important economic institution. Warsh was a middling mergers and acquisitions banker at Morgan Stanley before jumping into public policy as an adviser in the George W Bush White House, and owed his initial surprise 2006 nomination for a Fed governorship partly to close Republican party links. Warsh’s modest investment banking experience did prove valuable to former Fed chair Ben Bernanke during the financial crisis, but as a central bank policymaker, Warsh was mostly known as a sceptic of quantitative easing.
Warsh is often thought of as a hawkish candidate for the Fed chairmanship, but it may reflect political opportunism more than firm views on monetary policy. As a Fed governor when Barack Obama was president, Warsh leaned towards conventional Republican “hard-money” policies, but he has sounded much more flexible ever since he entered Trump’s orbit.
Chris Giles, Economics Commentator
Financial markets will be delighted the US president has avoided choosing an obvious patsy as chair of the Fed.
To get the job, Warsh has discarded some of his long-held hawkish views and now is a conviction evangelist for a US productivity miracle, allowing both rapid growth and low interest rates. Don’t tell Trump, but in his recent pronouncements he still advocates a much smaller Fed balance sheet. This would represent a tightening of monetary policy because the private sector, rather than money printing, would have to finance a large portion of US government debt.
This represents the big question for Warsh’s tenure. On interest rates we know he has to be dovish. But will he offset this with less visible tightening? Or has he sold his soul and his views to the president to get the job?
Martin Sandbu, European Economics Commentator
The change of personnel at the top of the Federal Reserve may matter less than the change in the nature of the job itself. Warsh takes on a position that is now under much stronger and more sustained political pressure than it has been for decades. That in itself suggests monetary policy will tilt towards the part of the Fed’s mandate concerned with supporting growth and employment, and away from inflation, even though Warsh himself is largely orthodox.
The bigger changes may come outside monetary policy. Warsh is likely to find it much harder than predecessors to make the Fed provide the global public goods it has done in the past — global liquidity through international agreements known as swap lines and the (just about) responsible regulation of banks with a global footprint. Add to this his seeming tolerance for market self-correction and the world may find itself with a reduced firefighting service the next time something in global finance combusts.
The most open question is how a Warsh-led Fed would deal with domestic financial market turmoil. Warsh has at times sounded like he would go for a “tough love” approach. That is not shared by Trump, who at the sign of trouble is likely to expect a turbocharged version of the Greenspan put, the idea that the Fed will bail out markets in times of turmoil. That tension, rather than monetary policy, may be the real challenge Warsh will sooner or later have to face.