How Warsh can give Trump rate cuts, keep Fed independent, and make the market happy
The confirmation hearing for President Donald Trump’s nominee for the next Federal Reserve chairman has once again sparked heated debate about the independence of the central bank. Senators on the Banking Committee on Tuesday grilled Kevin Warsh about how independent the Fed can be when the President openly calls for lower interest rates. Just hours before the hearing, Trump repeated the same thing on CNBC’s “Squawk Box,” saying he would be disappointed if Warsh didn’t cut rates “immediately” once he was confirmed and took over. President’s wishes aside, there are two questions that the market cares about most: Will economic data support the interest rate cut? If not, will Warsh still cut, risking the Fed’s ability to act free from political interference and thus investors’ views on the investability of U.S. financial markets? The cornerstone of the Fed has always been its independence to carry out its dual mandate of maximizing employment and promoting stable prices as it sees fit. Warsh, who served as Fed governor from 2006 to 2011, said at Tuesday’s hearing that practice would not change under his watch. “I am honored that the President has nominated me for this position, and if confirmed as chairman of the Federal Reserve, I will become an independent actor.” He added that all presidents generally favor lower rates because they support the economy. The only difference from this president, he said, is that Trump says it out loud. But Warsh emphasized: “The President never asked me to predetermine, to commit, to fix. [or] We will decide any interest rate decision in any of our discussions. And I would never agree to do that.” Gauging the Fed’s level of independence is somewhat subjective because views on the future path of interest rates can differ widely. Both before and after the Warsh hearing, the CME FedWatch broker had a near 70% chance of no cuts this year. The rate was 54% on Monday. If confirmed, Warsh would take over the Fed in May, when current central bank chief Jerome Powell’s term ends. Trump criticized Powell for not cutting interest rates more aggressively – Trump’s pick for Fed chair during his first administration has repeatedly threatened to oust Powell. The current Trump Justice Department is investigating Powell over costs related to ongoing renovations of two Fed buildings in Washington. Powell said the investigation is retaliation for the president’s failure to follow through on his orders. Does this mean an immediate interest rate cut under Warsh would compromise the market’s view of his independence? Of course, the economy is resilient, especially given last month’s strong jobs report. But revisions to mid-January and the dreaded February show job creation 7,000 positions lower than previously thought, but certainly rising since early 2023 Indeed, Senate Banking Chairman Tim Scott (R) touched on the impact of artificial intelligence during questioning, an issue on which Warsh expressed support for rate cuts. This puts the inflation mandate as the likely determining factor on interest rates squarely in focus, he said. I think it means a regime change in its execution. “I think this means a different, new inflation framework,” the Fed candidate said, arguing that there should be more focus on fundamental trends and less on one-off events. The biggest influence on inflation is the price of oil. The Fed is trying to eliminate the direct impact of oil by focusing on the core personal consumption expenditures (PCE) price index, which excludes food and energy due to their inherent volatility. However, crude oil prices represent an input cost for almost all goods and services, whether a direct input in production. Therefore, any consideration of rates We think it’s tied to the war with Iran and where it goes from here. If the war drags on longer, barring an all-out slowdown in the economy that would cause a material increase in unemployment, it will be difficult for Warsh to interrupt. However, if the ongoing peace negotiations before the US-Iran ceasefire ends on Wednesday are effective and the war ends soon, we think investors’ focus will turn to AI and AI, noting that “interest rates need to be forward-looking,” Warsh said during his hearing. He emphasized that it could take six to 12 months to roll out across the board, which brings us to another important consideration: a confirmation hearing is nothing more than an intense job interview. Warsh likely has much more to lose than any job if he turns out to be nothing more than a data-reliant, acting independently of the president’s wishes. This net worth, along with being married to Estee Lauder heiress Jane Lauder, whose fortune is estimated to be around $1.9 billion according to Forbes, indicates that he is more interested in preserving the Fed’s independence and thus stronger US financial health than in avoiding Trump’s revenge. “Fed independence means everything to me.” Also encouraging, Warsh made clear that he understands that letting inflation rise unchecked is much more costly in the long run: “Once you let inflation take hold in the economy, it’s more expensive and harder to bring it down, so the fatal policy error going back four or five years is a legacy that we’re still dealing with,” Warsh said. If it’s determined that higher rates are warranted, we think Warsh understands that sometimes you just have to take the medicine. All in all, at Tuesday’s hearing, we think Warsh did a solid job arguing that he would maintain his independence not only because it’s what the market wants to hear, but because it’s what’s best for the Federal Reserve and the United States. We believe Warsh will indeed be data-dependent. “Warsh will save the housing market,” Jim Cramner said on Tuesday’s Morning Briefing. “You don’t do that by destroying years of Fed independence; you do that by being data-dependent and fulfilling the Fed’s dual mandate. If the war with Iran is over relatively quickly, the labor market will likely come back into greater focus — and when it does, we think Warsh will cut interest rates, because the data warrants it.” (See here for a complete list of stocks in Jim Cramer’s Charitable Trust.) By subscribing to the CNBC Investment Club with Jim Cramer, you will receive a transaction alert before Jim sends a transaction alert before purchasing or selling a stock in his charitable trust’s portfolio. 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