Powell and Warsh set to clash
Federal Reserve Chairman Jerome Powell and Federal Reserve Nominee Kevin Warsh.
Reuters
When the Federal Open Market Committee meets again in mid-June, it will be the first time in nearly 80 years that an incumbent and a former president will conduct business together; This will be a historic overlap at a sensitive time for the central bank.
While the scenario looks like a clash of policy titans, the meeting with incoming Chairman Kevin Warsh and outgoing Jerome Powell will likely be less hostile — but still carry major policy risks.
“Both Kevin and Jay will be able to engage, and I think the rest of the FOMC will be able to engage as well, but I recognize that could be challenging,” said Loretta Mester, who is president of the Cleveland Fed until 2024 and knows full well what goes on behind the doors of committee meetings. “They’re all adults, and they all know what the Fed’s mission is, and I’m very confident that that’s what’s going to drive the decision-making process, not the other things people are worried about.”
Although Mester and other observers expect the Fed’s professional reputation to prevail, the potential for drama is evident. This unusual situation raises the possibility that policy positions will compete, even if only implicitly, as markets await the Fed’s next move.
After all, Warsh himself dealt a direct blow to Powell’s leadership by calling for “regime change” at the Fed. Moreover, President Donald Trump, who nominated both men, harshly criticized Powell and made no secret that he expected Warsh to cut rates.
Finally, Powell’s apparent final turn as Fed chairman underlined potential fault lines, with four striking dissenting views in the post-meeting statement, mostly from members who objected to a nuanced wording in the document that could be interpreted as a signal of policy easing.
Regional leaders are determined
For the imaginative, the three “no” votes from precinct chairs Neel Kashkari of Minneapolis, Lorie Logan of Dallas and Beth Hammack, who replaced Mester in Cleveland, could be seen as a shot in the arm in Warsh’s quest to lower interest rates.
“I don’t believe Kevin Warsh can come in there and convince his colleagues that it’s time for a rate cut,” Mester said. “He will also want to assess the economic situation before claiming it is time to raise interest rates again.”
In fact, current economic conditions provide little argument for policy easing.
At the same time, weekly unemployment claims fell to their lowest level since September 1969; This provided further evidence that the labor market was at least stable, as layoffs remained at the lowest level since the early years of former President Richard Nixon.
The data, then, reveals the potential for another conflict at the FOMC. The last time a Fed chairman remained in office after resigning was in 1948, when Marriner Eccles remained in office amid tensions with the Truman administration.
Economic, political pressure
“We should expect that any pressure on the Federal Reserve to cut rates due to the political cycle will result in a much more serious step back not only from Jay Powell but also from other members of the Federal Reserve,” said RSM chief economist Joseph Brusuelas.
He added that the environment is ripe for more conflict at the FOMC.
“This is what happens when you witness an attack on the central bank independence of the Fed,” Brusuelas said. “I don’t think there will be a toxic atmosphere on the Fed or a negative relationship between Powell and Warsh. However, I wouldn’t be surprised if Powell is the deciding vote on any move to cut interest rates prematurely.”
While Powell announced Wednesday his intention to remain at the Fed after his term as chairman ends in May, he downplayed the possibility of any competition, insisted he would not intend to obstruct Warsh’s agenda and promised he would not be a “shadow chairman.”
Instead, he focused on his desire to wait for the case to be concluded. inspector general’s investigation into the renovation of the Fed headquarters. Powell has tamped down expectations of domestic competition even while acknowledging broader political tensions.
“I plan to keep a low profile as governor. There’s only one seat,” Powell said, adding that he had no desire to be a “high-profile opponent or anything like that.”
“I think this is a very normal, standard transition process, and it will be,” he added.
Warsh could not be reached for comment.
Like Mester, former Fed Vice Chairman Roger Ferguson expects Powell to keep his word despite the potential for policy differences to emerge.
Ferguson also shares the confidence Powell expressed in Warsh to keep the Fed focused on its core goals of low inflation and full employment; but he will “walk a fine line, because it’s pretty clear that he has no vote for any immediate action, certainly not lower interest rates in the near term.”
“I don’t think he’s interested in being an alternative power source, a shadow chair or anything like that. He’s expressed confidence in Kevin Warsh and Kevin Warsh’s abilities, and I share that confidence,” Ferguson said on CNBC on Thursday. he said. “So I don’t think this is an effort other than to preserve the independence of the Fed and, frankly, to clear its name once and for all.”
