Warsh takes over Fed with a policy problem already in view
The emerging boom in artificial intelligence technology is reshaping the economy in ways that Fed officials say could be profound for workers, companies and consumers but would be difficult for Warsh and his colleagues to assess in real time. At the same time, inflation is already high and potentially heading even higher as the economy struggles to cope with shocks, including oil rising above $100 a barrel due to the US-Israeli war with Iran, higher import tariffs, and several other costs rising due to the rollout of utilities and artificial intelligence.
Warsh, 56, won Trump’s support during a yearlong public audition of top candidates, including those to join him on the Fed Board of Governors. Trump plans to swear in Warsh at the White House at 11 a.m. ET (1500 GMT). Warsh laid out ambitious reform goals for a central bank that he claimed began losing its way when he left his former governor’s seat in 2011 when he opposed the Fed’s bond buying. But now its first months may be filled with a more pressing dilemma: whether to raise interest rates to keep inflation from rising beyond the Fed’s 2 percent target, or to assert its credibility as an inflation fighter, a quality that will ultimately be considered at risk from the start.
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“Inflation is the Fed’s choice,” Warsh said at his Senate confirmation hearing; Its control over short-term interest rates is a lever it can use to increase or discourage spending, while trying to keep inflation at a target the Fed has set at 2%. The Fed has missed its target for more than five years and is now more than a point above that target. But how to reduce inflation may require difficult choices that sometimes conflict with the country’s policies and goals. With the Trump administration and sometimes with the Fed’s maximum employment target. From the moment he takes office as the Fed’s 11th chairman, Warsh will look over his shoulder at the global bond market that has begun to raise interest rates as a sign of rising inflation concerns, at his colleagues setting expectations that higher interest rates might be needed, and at Trump, who sees the rate hikes as a political attack on his own economic program and has harshly criticized outgoing Fed Chair Jerome Powell for not lowering borrowing costs.
Warsh’s comments and approach to the ongoing controversies surrounding the Fed, including the Supreme Court ruling on Trump’s so-far unsuccessful attempt to fire Gov. Lisa Cook, will also be watched and closely compared to Powell’s staunch defense of the Fed’s independence. Debate over policy is already at a fever pitch, with Fed Governor Christopher Waller, a Trump appointee and being interviewed for the chairman job, speaking about his policy views ahead of Warsh’s inauguration on Friday.
Waller, a long-time Fed staffer who has emerged as a key policy voice since her appointment to the board, has become increasingly cautious about the need for interest rate cuts as inflation concerns intensify. A more hawkish bias on its part could further reset market views that the Fed may need to raise interest rates in the coming months or, at best, keep the current rate in place for an extended period of time. Trump was outraged a few months after appointing Powell to replace Warsh as chairman in 2018. He called it “too late” for him not to cut interest rates even though tariffs and energy costs have kept inflation above the Fed’s target this year. However, in recent comments he appears to have given Warsh additional time and has not used a nickname so far.
The Fed’s next meeting will be on June 16-17, where policymakers will vote on interest rates and also present new economic projections. One of Warsh’s first major decisions will be whether he will offer a “point” on where he thinks interest rates will be at the end of this year, and in doing so reveal whether his views are too different from those of colleagues he criticizes for “groupthink”, or whether he will become an outlier with views that could further confuse markets already pushing up US long-term interest rates.
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While the Fed’s monetary policy decisions affect a range of consumer-facing and politically sensitive interest rates, such as on home mortgages, its “choice” on inflation is currently made in the context of sticker shock, which is not as readily available as gasoline at $4.50 per gallon.
They have become visible reminders of Trump’s failure to make progress on his landmark presidential promise that “we will end inflation and make America affordable again from day one,” which is now up to Warsh to deliver.
