President Trump pledges Fed independence as Kevin Warsh becomes chairman
“I want him to be independent.” President Donald Trump declared after Kevin Warsh was sworn in that he wanted an independent Federal Reserve chairman.
Kevin Warsh will serve a four-year term as chairman of the Federal Reserve, a role that will give him enormous influence over interest rates and the direction of the U.S. economy at a critical moment.
The 56-year-old former financial executive and adviser to President George W. Bush took office on May 22. He previously served on the Fed’s board from 2006 to 2011, a period when the central bank had to navigate the aftermath of the 2008 financial crisis. He returned to the Fed, which aims to maintain price stability and maximum employment, amid soaring inflation due to the Iran war and concerns about a stagnant job market outside of some industries.
“It is the honor of a lifetime to be called back to public service, and with this oath I accept a high and solemn responsibility,” Warsh said during a ceremony at the White House. “My goal now is to create an environment where talented people can do the best work of their lives, meeting every challenge with a spirit of common purpose and dedication to the national interest. In short, strive for excellence.”
Warsh replaces Jerome Powell, who has served as Fed chair since 2018 and said he plans to keep a “low profile” as a Fed director after Warsh’s confirmation. President Donald Trump appointed Powell as chairman for his first term in 2017. By the following year, the president was criticizing Powell, telling the Washington Post that he was “not at all happy” with his appointment. As Mr. Trump enters his second term, he has shown a willingness to exert influence over the central bank by pressuring the Federal Reserve to lower benchmark interest rates, raising concerns about the Fed’s independence.
At the ceremony, President Trump said he expected Warsh to become one of the “truly great” Fed chairs and that his candidacy would have the “full support” of his administration.
“Honestly, I mean this. I don’t mean it any other way. I want Kevin to be completely independent. I want him to be independent and do a great job. Don’t look at me. No one should look at me,” Trump said. “Thankfully, unlike some of his predecessors, Kevin understands that when the economy is strong, that’s a good thing.”
What kind of economy will Warsh inherit as Fed chairman?
In some ways, the economic situation Mr. Warsh inherits as Fed chair is similar to the one Mr. Powell faced when he took over in 2018.
In the first quarter of that year, the U.S. economy grew at an annual rate of 2%. This was in line with the Bureau of Economic Analysis’s prior forecast for the first quarter of this year. The unemployment rate was 3.9% in April 2018 and 4.3% in the same month this year. However, the inflation environment is different. Prices rose 2.5% year-on-year in April 2014, but rose 3.8% in April this year.
“The biggest challenges he faces are that the economy is strong, employment is good but not spectacular, and inflation remains stubbornly above the 2% target by every measure,” said David Royal, chief financial and investment officer at Thrivent.
Warsh also returns to the Fed at a time when consumer optimism about the economy is at record lows. The University of Michigan’s Consumer Sentiment Index fell for the third consecutive month in May, dropping to 44.8. Fifty-seven percent of survey respondents said high prices were “eroding” their personal finances, said Joan Hsu, director of consumer research.
What is the difference between Warsh and Powell?
Like Powell, another Fed board member-turned-chairman, Warsh is well known on Wall Street. He is also familiar with central banks, which could help generate consensus on the Federal Open Market Committee, which sets benchmark interest rates.
But Warsh wants the Fed to make some reforms. He suggested during his confirmation hearing that the Fed needs a new inflation framework and a communication style that is less focused on forward guidance.
“When the Fed speaks, the market reacts,” said Frank Sorrentino, founder and CEO of ConnectOne Bank, adding that that’s something Warsh wants to avoid. “In some cases, that can be a precursor to what kind of policy decisions they’re going to make, and it kind of gives the market some predictions and moves them in that direction. I don’t think Mr. Warsh thinks that’s a wise way to run an independent Fed because you run the risk of politicizing the decisions.”
At the same time, he said Mr. Warsh appears to be more forward-thinking than Mr. Powell when it comes to monetary policy decisions, noting that under Mr. Powell, the Fed’s decisions have relied on data available to policymakers at the time of their meetings.
“He has a very differentiated policy theory about the money supply, the Fed’s balance sheet, interest rates in general, the impact that AI is having and continues to have on the economy,” Sorrentino said of Warsh. “He wants to get ahead of things.”
What policies does Warsh support?
Mr. Warsh, once seen as someone focused on curbing inflation through higher interest rates, has recently advocated lowering borrowing costs.
Royal said there may be two reasons for that. First, Warsh sees AI-driven productivity as potentially inflationary. Sorrentino explained the logic that AI is expected to make jobs faster and cheaper, which could lead to an increased supply of goods and services. Due to the laws of supply and demand, prices may fall as a result.
As Jacob Robbins, an assistant professor of economics at the University of Illinois, previously told USA TODAY, he cautioned: “We need to be very confident in what impact AI will have on the economy before calling for interest rate cuts at this point.”
Royal said the second reason is that Warsh also advocates shrinking the Fed’s balance sheet. If that happens, Sorrentino said, it could reduce liquidity in the economy, reduce asset values and ultimately lead to lower inflation.
Sorrentino said Warsh “believes the Fed’s balance sheet is distorting the economy. There’s too much cash running around chasing assets.” “What’s the evidence? If you look at where the gold is, where the market is, where the cryptocurrencies are… they’re inflated.”
What consumers can expect
Historically, markets have fallen following the confirmation of a new Fed chair. Royal said investors shouldn’t be surprised if something like this happens again after Warsh takes over.
“He’s not a current Fed director, and when he takes office he’s less well-known than other Fed chairs, so I’m just going to keep an eye on that volatility,” he added.
The next FOMC interest rate decision will be in mid-June, which will be Warsh’s first decision as chairman. As of May 22, policymakers expect to keep the federal funds rate unchanged this year, in the range of 3.5% to 3.75%.
Contact Rachel Barber at rbarber@usatoday.com, follow her at X @rachelbarber_ and subscribe to her newsletter Making More of Your Money here.
