Chairman Warsh? Not likely
By Dr. Harold A. Black
blackh@knoxfocus.com
haroldblackphd.com
The media wants us to believe that former member of the Federal Reserve Board of Governors Kevin Warsh is Trump’s favorite to replace Jerome Powell. Rumor has it that when the president kept blasting Powell on social media, that Warsh told him to cool down the rhetoric, leading Trump to say that he was not going to fire Powell (which would be a royal mess). Warsh suddenly became the focus of the media, giving speeches, being on panels and showing up on talk shows. Many think that when Powell’s term expires on May 25, 2026, Trump will replace him with Warsh. But not so fast, my friends. Powell’s term as governor doesn’t end until January 31, 2028. So what happens if Powell does not resign as governor? Then Trump will not be able to select Warsh or anyone else unless some other governor quits. Of course, Trump could try to fire Powell after his term as chair expires, which would be less contentious. Of course, Powell could be reappointed as chair, which has zero chance of happening.
Nonetheless, Warsh would not be a logical fit given the president’s obsession with low interest rates. Warsh was not a fan of the expansive monetary policy during then Fed chair Ben Bernanke’s final year. He was also critical of Bernanke straying outside the Fed’s traditional lane. Bernanke introduced the press conference following the Open Market Committee Meeting – something continued by Janet Yellen and Powell. Previous Fed chairs were more secretive by not giving the public and the markets what amounts to forward guidance. When I was a Nashville Fed director, I recall a meeting in Alan Greenspan’s office. In two frames was a reporting of a testimony on what the Fed was going to do with interest rates. One article said that Greenspan indicated that rates might go down. The other said that Greenspan hinted that rates might go up. Greenspan said it was the perfect testimony. Greenspan also ordered the firing of a regional bank director who told his local newspaper about the deliberations held at one of the policy meetings. I also remember Greenspan telling all of us directors and all the reserve bank presidents to never say anything that could move markets. I had also served on the deregulation committee established by the Monetary Control Act of 1980. Paul Volcker was the chair and cautioned secrecy. These Fed chairs followed the dictum of “never explain and never apologize.”
One thing a Chairman Warsh would do is to stop the Fed’s reliance on current government data. This too is a product of Bernanke. Monetary policy operates with a significant lag of 12-18 months. Current data reflect the impact of actions past. Thus, the market waiting breathlessly to see what the latest figures on unemployment and inflation is of little value in making decisions about monetary policy today. Moreover, those are preliminary data that are being reported. Those data are always revised later and could be quite different from the earlier data. Yet the Fed is acting as though these unreliable early projections are in fact important in decision-making. Warsh would stop this nonsense.
A Chairman Warsh would return the Fed to its roots. The chair would not be blabbing about the outcomes of the Open Market Committee. Warsh would also be less accommodating to the whims of the Congress and importantly to those of the president. Bernanke’s Fed endorsed increased federal spending, leading to an increase in the national debt and the resulting inflation that characterized the Biden years. Warsh has said, “Each time the Fed jumps into action, the more it expands its size and scope, encroaching further on other macroeconomic domains, encouraging misallocation of capital, increasing the risk of future shocks, and compelling the Fed to act even more aggressively.” Does that sound like someone who would be simpatico with Donald Trump’s obsession with lowering interest rates? Not likely, and if Warsh were appointed Fed chair and abandoned his principles like so many have before him, the markets would not take seriously anything else he might say.
By the way, Warsh does not need the job. He is married to Jane Lauder, heir to the Estee Lauder fortune.
