Interest Rate Changes Could Be on the Way Under Trump's Pick For Fed Chair

• Incoming Federal Reserve Chair Kevin Warsh is likely to push for lower interest rates in the short term, but it’s an open question whether he will get them.
  

• Over the long run, Warsh may keep interest rates higher than some of the other candidates considered for the job.
  

• Warsh’s experience as a Fed governor could help him establish credibility in the role.
  

President Donald Trump’s selection of former Federal Reserve governor Kevin Warsh to chair the Fed could instill confidence in financial markets that an experienced hand is at the helm. However, it could ultimately lead to a significant reshaping of the central bank and lower interest rates in the short run.

Warsh has experience on Wall Street and one major qualification in Trump’s eyes: a recent history of advocating for the Fed to lower its key interest rate. He has also frequently criticized the way the Fed does business, and analysts expect him to overhaul several aspects of its operations.

Several experts said the selection of Warsh was better for the central bank’s credibility than other names floated for the position, who had closer ties to Trump. That could bolster public confidence in the Fed at a time when its independence from the White House is in question.

The Fed could keep interest rates higher under Warsh’s tenure than if another of Trump’s front-runners took the job: that could mean lower inflation and a cooler economy down the road, a prospect that sent stocks and precious metal prices lower and the dollar higher Friday.

Financial markets expect that, under Warsh, the Fed will likely lower its key interest rate at the outset of his four-year term, which would begin in May. Several analysts said he could be less inclined to rate cuts after that, however, given his history as a “hawk” who has typically favored higher rates to push down inflation.

“Kevin Warsh has spoken out in favor of lower interest rates, but he is a pragmatist who won’t want to lose market trust by making cuts that aren’t warranted,” Heather Long, chief economist at Navy Federal Credit Union, wrote in a commentary. “His long history of concern about inflation suggests that he won’t allow the economy to overheat.”

Few experts expect Warsh to undertake the kind of steep rate cuts Trump has demanded from the Fed in recent months.

“It’s not clear that Warsh would be in favour of an aggressive easing of monetary policy,” Richard Flax, chief investment officer at Moneyfarm, wrote in a commentary. “During the financial crisis, he was apparently concerned about the aggressive quantitative easing that the Fed undertook—fearing the potential impact on inflation.”

Warsh’s ability to steer the Fed toward modest rate cuts could be limited. Warsh must win over a majority of the Fed’s 12-member Federal Open Market Committee to make any moves. The Fed’s leadership has been divided about whether to cut interest rates to boost the job market or keep them higher for longer to fight inflation.

“If anything, it is an environment where building consensus is harder and where the new Chair’s power is likely weaker, not stronger than usual,” Jake Krimmel, senior economist at Realtor.com, wrote in a commentary. “In short, given the complicated macro environment Warsh is facing, the outspoken FOMC he is inheriting, and the unusually politicized circumstances from which he is emerging, Warsh may find it more difficult to win over new colleagues and voters in ways his recent predecessors did not, which could mean less clear guidance from the Fed and noisier signals for markets.”

Given Warsh’s experience at the Fed during the financial crisis, he may bring some gravitas to the job. Warsh, a lawyer by training and former executive at Morgan Stanley, was widely regarded as the Fed’s liaison to the world of finance during the 2008 crash, when Ben Bernanke was chair.

“With five years of history on the Board of Governors under the Bernanke Fed, Kevin Warsh was known as Bernanke’s bridge to Wall Street,” Jeffrey Roach, chief economist at LPL Financial, wrote in a commentary. “Warsh is also known as a critical thinker and should have no problem getting confirmed. He will not likely act as a yes-man.”

Financial market participants seemed to be reassured by Warsh’s selection on Friday.

“He’s likely to stay close to market players again and want to ensure he keeps the market’s trust,” Long wrote. “This is likely why the U.S. dollar is firming and gold and silver are falling on news of his nomination.”

Although Warsh is experienced, that doesn’t mean it will necessarily be business as usual for the central bank. He is a longtime critic of the Fed’s leadership and could bring about institutional changes. In particular, he could scale back the bank’s use of its balance sheet, that is, its buying and selling of securities to manage financial markets.

“Warsh has been consistently critical of the Fed’s active use of its balance sheet over the past ~15 years,” economists at Deutsche Bank led by Chief Economist Matthew Luzzetti wrote in a commentary. “This has earned him the label of a ‘hawk’, at least with respect to the Fed’s balance sheet.”

Whatever is on Warsh’s agenda, experts said his first step will likely be to establish his credibility for keeping the Fed independent and his determination to keep inflation in check. That commitment could be tested immediately, assuming Trump continues his persistent political pressure on the bank to rapidly cut interest rates.

“As with any Fed chair, Warsh will have to earn market trust and credibility around his commitment to achieving the inflation target,” Porcelli wrote. “These bona fides always need to be earned by an incoming chair. The requirement could be more acute in the current context, with inflation well above target for five years and the President’s calls for steep Fed rate cuts.”

Update, Jan. 30, 2025: This article has been updated after publication to include fresh comments from experts after Warsh’s nomination.

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