Trump taps former Federal Reserve insider to replace Powell

Washington: President Donald Trump chose former Federal Reserve Governor Kevin Warsh to head the U.S. central bank when Jerome Powell’s term as leader ended in May, giving the Fed’s frequent critics a chance to introduce the idea of ​​monetary policy “regime change” at a time when the White House is pushing for more control over setting interest rates.

“I have known Kevin for a long time and I have no doubt that he will be one of the GREAT Fed Governors, perhaps the best. Above all, he is a central player and will never let you down,” Trump said, explaining his latest move to leave his mark on the Fed, which he has persistently criticized for not giving in to demands for deep cuts in borrowing costs.

Global stocks rose while the dollar rose and the price of gold fell after Trump said he would pick Warsh, whom markets perceive as someone who will support lower rates but stop too soon the more aggressive easing associated with some of the other potential candidates.

Trump announced his candidacy, which must be approved by the US Senate, in a post on social media on Friday.

It’s unclear how quickly Warsh’s nomination will pass the divided Senate. A key Republican on the Senate Banking Committee, which will be the first body to review the nomination, repeated Trump’s earlier promise to the Fed that he would not support any nominee as long as the Justice Department continues its criminal investigation into Powell, which was made public earlier this month.

“My position remains unchanged: I will oppose the confirmation of any Federal Reserve nominee, including the position of Chairman, until the Justice Department’s investigation into Chairman Powell is fully and transparently resolved,” North Carolina Senator Thom Tillis said in a post on X.

With Republicans holding a 13-11 majority on the committee and all Democrats likely to oppose Warsh’s nomination, Tillis could deadlock the panel if he maintains his current position.

The Fed has long been viewed as a stabilizing force in global financial markets because it is perceived to be independent of politics, and Trump’s efforts to test that independence will be a major issue through his confirmation process.

It also opened the door to the possibility that Powell, who has called the criminal investigation an excuse to pressure the Fed to set monetary policy the president’s way, could choose to remain as chairman even after his term as central bank chief expires to protect the Fed from political takeover.

Warsh favors major overhaul of central bank

While Warsh, 55, is not a White House insider, he has been a confidant of the president and a guest at the president’s Florida mansion and appears poised to push through many of Trump’s priorities as Trump’s “shadow” Fed chief until Powell’s term ends in mid-May.

Warsh, a lawyer and distinguished visiting fellow in economics at Stanford University’s Hoover Institution, said he believes the president was right to pressure the Fed for steep interest rate cuts and criticized the central bank for underestimating the inflation-reducing potential of artificial intelligence-powered productivity growth.

He also called for a broad overhaul that would shrink the central bank’s balance sheet and ease bank regulation.

Warsh was nearly elected to the post before being handed over to Powell in Trump’s first term, and has since maintained a steady public profile through speeches and articles that took Powell and his colleagues to task over their management of the Fed’s balance sheet, interest rates and other actions.

He will now take charge of an institution that he says must shrink its footprint in the economy and change the way it manages monetary policy.

Warsh, who has a background on Wall Street, including being a partner in the office that manages the fortune of investment mogul Stanley Druckenmiller, and family ties to prominent Trump supporter Ron Lauder, will be under an intense spotlight to prove his independence from the president.

Warsh, who served as Fed governor from 2006 to 2011, was close to Wall Street executives and investors, making him then-Fed Chairman Ben Bernanke’s chief liaison to the financial community during the 2007-2009 financial crisis.

Although he did not oppose the massive bond purchases that Bernanke used to rescue the economy from a long downturn, he worried that they would increase inflation and eventually resigned. Warsh’s inflation concerns turned out to be misplaced, but the size of the Fed’s balance sheet and the role it plays in managing interest rates continue to cause concern.

He now argues that shrinking the Fed’s massive balance sheet would allow the central bank to “redistribute” excess liquidity in financial markets to the real economy by lowering its policy rate.

Reuters

Get notes directly from our foreign correspondents on events making headlines around the world. Sign up for our weekly What’s on in the World Newsletter.