The new Fed chair: Kevin Warsh 'catches the car'

• The writer is the managing partner of Arbroath Group, a geopolitical strategy firm, and was a senior economic adviser to President Barack Obama

The open secret about Kevin Warsh for at least the last decade is that his burning ambition was to become Chair of the Board of Governors of the Federal Reserve System. But like most burning ambitions, the achievement of the goal itself is often fraught with risks, puzzles, and a sudden sense of anti-climax. "Kevin Warsh is the dog who caught the car," said a longtime Stanford colleague. Along with investors everywhere, Warsh may now be asking: "What now?"

With Senate confirmation on Wednesday, the health of the global economy will be viewed as substantially in his hands, as US interest rates shape global credit cycles and financial flows. He arrives in office having run a seemingly deliberate campaign that aligned with the president who appointed him. He brings to the job a sterling resumé, which includes stints as an economic advisor to President George W. Bush, a scholar at Stanford’s Hoover Institution, and an advisor to a prominent investment fund. He knows the Fed well, too, having served five years as a governor through the Global Financial Crisis.

American ingenuity

Still, as Trump openly denounced outgoing Fed chair Jerome Powell as a “major loser” and a “fool,” Warsh started angling for the president’s favor. Last November, he wrote an article for the Wall Street Journal under the headline: “The Federal Reserve’s Broken Leadership.” After a career as an inflation hawk, he argued that productivity improvements and deregulation could allow US economic growth to rise without necessarily fueling price pressures. Some of this may come from artificial intelligence, he argued, but much more is owed to the "AI" that stands for “American ingenuity.”

More intriguing, perhaps, was Warsh’s insistence that the Fed’s expansive balance sheet has offered too much liquidity to financial investors on Wall Street, but not enough to the businesses and households on Main Street. He argued for reducing excessive regulation on banks and abandoning efforts to negotiate international capital standards.

In his Senate confirmation hearings, Democrats denounced Warsh as a “sock puppet” who would take orders from the White House rather than making interest rate decisions based on what was best for price stability and growth. They were hardly reassured when Warsh aligned with other Trump appointees and refused to say directly that Joe Biden had won the 2020 presidential election (which the president himself contests to this day).

But even the narrowest confirmation vote in the history of the Fed is not the worst of Warsh’s challenges. Above all, he may have trouble delivering the lower rates that Trump has demanded. The conflict in Iran has triggered an energy price spike that showed up in the latest US consumer price inflation rate at 3.8%, its highest level in three years. Even with better data, Warsh is only one vote on the Federal Open Market Committee that he chairs and may need time to gain the trust of his fellow members.

Structural challenges of the new era

Warsh also assumes his responsibilities at an especially tricky time for monetary policy. Beyond his own analysis of rising US productivity, Warsh will have to understand the competing pressures from a US labor force that is shrinking as Baby Boomers retire and immigration restrictions tighten. Separately, while investors may share his worries about excessive stock valuations, they remain deeply uncertain about just how much or how fast Warsh can trim the Fed’s portfolio of government bonds without disrupting credit markets already under strain.

For now, despite the worried chatter of scholars and market strategists, there are few signs that investors believe Warsh or the Fed will suddenly start taking orders from the White House. Markets certainly aren’t pricing in any more rate cuts before next year, and talk is rising that the next rate move may actually be higher. Of course, investors will also be watching anything Jerome Powell may say about Fed independence, having chosen to stay on as a Fed governor until the completion of investigations into his role in cost overruns for headquarters renovations. Prosecutors have dropped the case, but say they may reopen their probes if an Inspector General finds improprieties.

But most bondholders may draw confidence from the simple fact that Warsh’s job looks secure for the next four years, and his re-appointment will not depend on whatever Donald Trump says about him between now and then. This should leave him free to set rates as he and his colleagues interpret the data and analyze changes in the US economy.

*Opinions expressed in this article are the author's own and do not necessarily reflect the editorial policy of Anadolu.