Fed nominee Kevin Warsh faces impossible task in rate cuts sought by Trump
Kevin Warsh, the nominee to be chairman of the Federal Reserve Board of Governors, faces the prospect that he might not be able to implement the rate cuts that President Donald Trump has called for.
The economic conditions have changed dramatically since Warsh was nominated, especially because of the Iran war, in ways that would make it much more difficult for the central bank to pursue monetary easing.
Most significantly, inflation rose sharply in March, thanks in large part to higher oil prices.
So if Warsh, 55, is confirmed in the coming weeks or months, he could find himself in a similar situation as current Chairman Jerome Powell, who has faced constant criticism from Trump for failing to lower interest rates.
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“I think Warsh, primarily, if he is confirmed and has the job, will be mindful that his own reputation and the reputation of the Federal Reserve is at stake, if he and they were to allow politics to infect their decision-making, meaning pressure from the White House,” Mark Hamrick, senior economic analyst at Bankrate, told the Washington Examiner.
Traditionally, the Fed is insulated from White House pressure. Trump, though, has tried hard to sway the central bank’s monetary policy. While some expect that Warsh will act independently, others wonder about the pressure to cut interest rates that would have undoubtedly been discussed in interviews for the job.
“I think it’s incredibly unlikely that Trump would have nominated without some sort of promise and pledge as to his fidelity to lowering rates in the short term,” Marc Short, chairman of Advancing American Freedom and former chief of staff to Vice President Mike Pence, told the Washington Examiner.
The rise in inflation in March led investors to bet that the Fed, which needs a majority vote to change interest rate policy, will end up holding off on any rate cuts for some time.
As of Monday, the implied odds of a rate cut at the Fed’s next meeting in June were just 1.6%, according to CME Group’s FedWatch tool, which calculates the probability of rate changes using futures contract prices for rates in the short-term market targeted by the Fed. The odds of at least one rate cut in all of 2026 are only about 30%.
And there are mixed views about what is going to happen next with the economy, particularly given the uncertainty about what is going to happen next with Iran.
Some argue that energy prices could fall by June. That would give the Fed leeway to cut rates. But others argue upward price pressures from the war could persist for months. There is also a question of whether the labor market softens. If there are signs that unemployment is rising, Fed officials will be more likely to ease monetary policy.
Steve Swedberg, a policy analyst at the Competitive Enterprise Institute, a libertarian think tank, called the situation a “precarious spot.” He said that if inflation is still up and Warsh votes to lower rates when he enters office, it could raise questions of whether Warsh is looking at the hard data or just trying to appease the president.
But there is still much uncertainty and differences of opinion on what might be the best course of action with interest rates.
“You can even argue that what’s going on in Iran right now is supply-driven inflation; it’s not on the demand side, so tightening the interest rates is not going to fix that particular issue,” Swedberg told the Washington Examiner. “For me, it’s mostly speculative. I mean, it could go either way.”
Swedberg said he will have a better sense of where Warsh’s head is after his confirmation hearing, which has not yet been scheduled. Warsh will undoubtedly face a grilling from lawmakers over questions about the Fed’s independence and whether he made any guarantees to Trump about interest rate policy.
Also, the Fed chairman is just one vote on the monetary policy committee. Even if Warsh came in pushing hard for a cut, the other members of the panel could prevent him from enacting it.
Despite that, the Fed chair can shift the tone toward a more dovish monetary policy — although whether the committee participants would go along is an open question.
Fed governor Stephen Miran, appointed by Trump last year, has dissented at several Fed meetings in favor of cutting rates faster. And Warsh could dissent on a decision not to cut rates.
“I think it’d be extraordinarily unusual to see the chairman vote one way and lose a vote,” Short said about such a scenario. “That would be, I think, quite extraordinary.”
But all of this, whether Warsh will even be sitting in on the June meeting, comes down to whether he can get confirmed in time after Powell’s term expires in May.
Earlier this year, in an astonishing video statement, Powell disclosed that he was being investigated by the Justice Department for claims he made during congressional testimony. He has said the inquiry is an effort by Trump to influence interest rate policy.
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Retiring Sen. Thom Tillis (R-NC), a member of the Senate banking committee, vowed to block Trump’s nominees to the Fed and whoever he nominates to replace Powell until the legal matter has concluded.
Short said the investigation could undermine Trump’s goals by delaying Warsh’s confirmation, although he predicted that the administration would eventually relent because it is in its interest to get Warsh confirmed.