Fed pick Kevin Warsh apt to cut interest rates anyway
The war in Iran has caused oil prices to rise and raised concerns about a resurgence in inflation. That has led Federal Reserve officials to raise the possibility that the Fed may pause its recent efforts to lower interest rates or even potentially raise rates.
But this is the Fed as it is now known. The central bank is likely to have a new leader soon who looks at inflation very differently. Kevin Warsh, if confirmed by the Senate, could easily lower interest rates despite the rise in oil prices.
Warsh is President Donald Trump’s nominee for the next chair of the Fed. He will replace Jerome Powell, whose term ends May 15. Trump formally sent Warsh’s nomination to the Senate on Wednesday.
Warsh said before his election that he believed interest rates should be lower than the current federal funds rate of 3.5 percent to 3.75 percent, and Trump made clear that he chose Warsh because they shared his desire for lower rates.
A rise in inflation could be a challenge for a nominee who must win Senate confirmation while maintaining the president’s support.
a barrel Brent crude oil It sold for about $72.50 on Friday, before U.S.-Israeli military action began. It was trading above $82 on Wednesday evening. Rising gas prices have raised the possibility of higher prices across the economy as Republicans try to convey a message of affordability in the midterm elections.
A permanent $10-per-barrel increase in the price of oil could add as much as a tenth of a percent to the core inflation measure the Fed focuses on, Daleep Singh, chief global economist at asset manager PGIM Fixed Income, wrote in a note to clients late Tuesday.
In that scenario, “the most likely response from the Powell Fed would be to confirm an extended pause,” wrote Singh, who advised then-President Joe Biden on national security.
These issues may become academic subjects. The Trump administration says it plans to help reverse the rise in oil prices and that the war could end once Warsh takes office in May or June.
Fed members differ from Warsh
Some of the Fed’s voting members showed further concern over the prospect of Warsh becoming chairman, saying they were concerned about how Iran would negatively impact the economic outlook.
“I was very confident until a few days ago,” Minneapolis Fed President said Neel Kashkari said at a Bloomberg event in New York on Tuesday. He said he now needs to see more data to make a decision about what will happen to interest rates.
New York Fed President John Williams said at an event in Washington on Tuesday that he wanted to see “how persistent this is.”
This is a normal situation for Powell Fed. Much attention has been paid to how conflict affects oil prices and inflation more broadly. Powell warned that the “rise in crude oil prices” following Russian President Vladimir Putin’s invasion of Ukraine in 2022 “put additional upward pressure on inflation.”
Warsh sees it differently. “The Fed leadership blamed Putin for inflation,” Warsh told Fox Business’ Larry Kudlow in July.
Warsh says Fed’s ‘fundamental theory of inflation’ is ‘wrong’ Barron’s in autumn. The agency is constantly trying to fine-tune its assessments of how supply and demand affect prices. But according to Warsh, the post-Covid inflation spike is clear evidence that the Fed is looking at the wrong factors.
“I think, at its core, inflation occurs when the government spends too much and suppresses too much,” Warsh said.
Small fluctuations in oil prices don’t matter much in this worldview. He believes he can lower the long-term interest rates that matter most to consumers by ridding the Fed of some of the $6.5 trillion in financial assets it has acquired in recent years and restoring faith in the Fed’s credibility overall.
Warsh also expects advances in artificial intelligence to make the economy more productive and believes interest rate hikes will put those gains at risk.
The Fed declined to comment. Warsh has not spoken publicly since Trump announced his pick on Jan. 30. Warsh declined to comment for this story.
The Fed chairman has only one vote out of a dozen on the rate-setting committee, but dissent against the chairman is rare.
The Fed was designed by Congress to be free from political influence, but the president has the power to decide who to nominate. Trump has insisted that rates be 1% or lower.
Warsh’s theory of inflation is designed to make a case that is essentially bulletproof against disruptions to this economy unless something changes drastically. Even an all-out air war with a major global oil producer probably wouldn’t change that.
