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.
At Kevin Warsh’s swearing-in as Fed chairman, President Donald Trump told the new chairman to be “independent” and “don’t look at me, don’t look at anybody, just do your thing and do a great job.”
It will be tested soon.
Warsh will likely have to deliver some unwelcome news to Trump after his first meeting as Fed chair, as markets expect the central bank’s benchmark interest rate to remain unchanged despite Trump’s consistent calls for lower borrowing costs.
The Fed typically responds to labor market concerns by lowering interest rates to make borrowing cheaper and help stimulate the economy. Generally, they raise prices to reduce spending and lower prices in response to rising inflation. Policymakers stabilize them when they feel they are in a good situation or when they are waiting for more data to make a decision.
Economists say solid job gains and rising inflation over the past three months due to the Iran war have left policymakers with little room for cuts. The president said earlier this month that there was “no reason” to raise rates, but in recent weeks traders have shifted their expectations from lower rates to a possible rate hike later this year or early 2027.
“For the Fed to cut rates, there would have to be some new negative shock to the job market, whether it’s an escalation in the Middle East conflict or the realization of the potential downside risks to jobs from AI,” Bill Adams, chief U.S. economist at Comerica Bank, told USA TODAY. “If that doesn’t happen, the Fed will have a hard time justifying rate cuts in the current environment.”
Forecasters expect policymakers to keep the federal funds rate target in the 3.5% to 3.75% range so far this year after their next two-day meeting starting June 16.
What you need to know about Kevin Warsh
Mr. Warsh served on the Fed’s board from 2006 to 2011, when he earned a reputation as a hawk, meaning he focused on reining in inflation through higher interest rates. However, as a candidate, he predicted that increased productivity through AI and the shrinking of the Federal Reserve’s balance sheet could be disinflationary factors, and called for lower borrowing costs.
Today, “I don’t think anyone knows what Kevin Warsh’s true reaction function is,” said Darius Dale, founder and CEO of macro research firm 42Macro.
Dale added that the second unknown is how receptive his colleagues on the Federal Open Market Committee will be to his “vision” for the central bank. Warsh said during his Senate confirmation hearing that the agency has not “delivered” on its promises.
“Remember, he’s been basically criticizing them for years and criticizing them in a way that I think makes it really difficult to lead this agency,” Dale said. “They’re all professionals, and I think, generally speaking, they want a good outcome for the American people, but they’re still human beings. Their new boss is someone who has criticized them publicly for years.”
Dale also highlighted two of Warsh’s most important teachers, Stanley Druckenmiller and the late Milton Friedman.
“He learned economics from two of the brightest economists in the history of the world, and they have very different views about how the economy works than the current members of the FOMC,” Dale said. “He will be talking about things that American central bankers haven’t talked about in decades.”
Warsh also advocates relaxing the Fed’s forward guidance.
“Everyone expects, not just Mr. Powell, to be as good a communicator as the last three chairmen,” said David Royal, Thrivent’s chief financial and investment officer. “So he’s going to be kind of evasive, and that could destabilize the market a little bit in the long run?”
Warsh’s first challenge may be inflation.
When measuring inflation, the Fed typically prefers to refer to the Bureau of Economic Analysis’ Personal Consumption Expenditures (PCE) Price Index. In the latest release, PCE rose 3.8% for the year in April. Core PCE, which excludes volatile food and energy costs, rose 3.3% over the year.
It also investigates the consumer price index. The Labor Department’s latest report shows prices rose 4.2% in May compared to the same month last year, reflecting higher gasoline prices and the biggest jump in three years. Last month, core CPI inflation rose 2.9% year-on-year. However, the core CPI increase rate in May was only 0.2%, slower than the 0.4% increase in April. This is probably a sign that rising fuel prices have not dramatically increased the cost of other goods.
Mr. Warsh has indicated his preference for a different measure known as the “trimmed average PCE inflation rate,” which filters out extreme outliers before taking a weighted average. In April, prices rose 2.3% for the year.
Brian Bethune, an economics professor at Boston University, said the trimmed average PCE is not the most reliable metric right now. Simply put, it works best when inflation shocks behave like they did from 2009 to 2019 before the 2020 coronavirus crisis, when there is a better balance between positive and negative shocks. However, if price shocks are primarily positive, such as due to supply shocks, tariffs, high oil prices, or major unusual sporting events such as the World Cup, inflation will be underestimated.
“So I hope someone will call him out on that,” Bethune said.
No matter what index forecasters think, inflation is still above the Fed’s 2% target, as it has been since spring 2021.
What is the Beige Book? What does it say about the U.S. economy?
The Fed’s Beige Book could also help inform policymakers’ next interest rate decisions. This is a report that provides information on economic conditions across the Fed’s 12 districts.
The latest Beige Book, published on June 3, suggests that while wage growth has broadly kept pace with inflation, businesses are absorbing higher input costs to maintain customer demand, which typically happens when businesses feel consumers cannot tolerate further price increases.
Americans seem to agree. The University of Michigan’s consumer sentiment index hit an all-time low in May, with 57% of respondents saying high prices are “eroding their personal finances,” said Joan Hsu, director of consumer research.
The Beige Book also suggested that while demand for data centers is leading to additional manufacturing jobs, other sectors remain in a “low employment” and “low recruitment” environment.
The Department of Labor’s May jobs report, released June 5, showed an increase in employment in the leisure and hospitality sector, and Bethune said this was likely due in part to a temporary increase in summer employment related to the World Cup. The health care and social assistance industry continues to be a reliable driver of job growth.
Questions remain about Fed independence
Warsh joins the central bank at a time when its independence from politics is being called into question. Maintaining the institution’s credibility will be part of his job.
Trump nominated former Federal Reserve Chairman Jerome Powell to the role in 2017. Mr. Trump’s criticism of Mr. Powell began shortly after Mr. Powell became chairman. After President Trump took back the White House, criticism increased again. The president insulted the Fed chairman, and the two men clashed over funding for a multibillion-dollar renovation project at the Fed’s headquarters in Washington.
The project ultimately led to a Justice Department investigation into Mr. Powell, which former Fed chairmen called an “unprecedented attempt to use prosecutorial attacks to undermine central bank independence.” Powell himself condemned the investigation in an unusual statement. The Justice Department closed the investigation in April.
Mr. Powell remains a member of the Federal Reserve Board.
President Trump last year tried to fire Fed Director Lisa Cook over allegations she committed mortgage fraud in 2021, but Cook denied wrongdoing and challenged the move in court. The Supreme Court heard oral arguments in the case in January but has not yet issued a decision.
Contact Rachel Barber at rbarber@usatoday.com, follow her at X @rachelbarber_ and subscribe to her newsletter Making More of Your Money here.
