With inflation spiking and Treasury yields surging, Warsh is likely to confront a Federal Open Market Committee in no mood to ease.
If new Federal Reserve Chair Kevin Warsh is still itching for a "good family fight" over monetary policy, he is likely to get one if he sticks to his guns on interest rate cuts.
With inflation spiking and Treasury yields surging, Warsh is likely to confront a Federal Open Market Committee in no mood to ease. In fact, several officials of late have stressed the need for the Fed to keep its options open for rate hikes ahead.
If it looked like outgoing Governor Stephen Miran was a lone wolf howling for reductions, seeing a Fed chair trying to defy his fellow policymakers and push for cuts will loom even larger.
Those who have watched Warsh over the years, from his prior stint as a Fed governor through his high-profile public disagreements with Fed policy since, expect him to put up strong arguments for cutting. The problem is, he's likely to lose at least in the short term, a situation that sets up some interesting communication issues for the new central bank leader.
"I saw him in action. He does base his decisions on his view of the economy, and even his arguments for why he would favor rate decreases in general were based on his read of what's happening structurally in the economy," said former Cleveland Fed President Loretta Mester, who served with the Philadelphia Fed during the prior period when Warsh was on the board. "I just don't think right now he can make those arguments in a credible way, because we have an inflation problem." Indeed, surging inflation will be Warsh's first and primary policy challenge.
Officially, Warsh has echoed much of the Trump administration's position on the current run of price surges — mainly that they are temporary and will fade once the fighting in Iran ceases and various disinflationary forces, such as increased productivity, take over.
However, those arguments face a tougher audience now with inflation levels at multi-year highs.
Warsh made the "family fight" remarks during his Senate confirmation hearing, a remark, along with other caustic comments he's made about the Fed, that central bank observers privately say could come back to haunt him.
At the most recent meeting, in late April, three members of the Federal Open Market Committee, the central bank's rate-setting arm, voted against the policy statement.
The vote homed in on one sentence in the missive that investors took to imply that the next move would be a cut: "In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks." However, it is just that disagreement that could allow Warsh to put a quick imprint on the Fed. By convincing the balance of the other 11 FOMC voters to remove it, he would further his oft-stated disdain for such "forward guidance" while also rallying the panel around a common objective, namely to preserve optionality for future moves.
"You get plenty of contrarian thinking in there. Kevin Warsh is a very fortunate man in his experience. Family fights generally lead to constructive outcomes," said Lou Crandall, chief economist at Wrightson ICAP and a leading voice in internal Fed machinations.
"On the one hand, he can present this as not a tightening signal, just a shift to more agnostic communications framework," he added. "There is a PR element that would be helpful to him. He doesn't have to say that the committee forced his hand in his first meeting to go to an effectively more restrictive stance." President Donald Trump nominated the new chair with clear statements that he expected lower interest rates. Should Warsh fail to deliver, it could set up the same kind of relationship Trump had with outgoing Chair Jerome Powell: a perpetual clash that saw frequent personal attacks and ultimately involved the Justice Department, as well as a historically unprecedented level of discord between the administration and central bank.
So might Warsh be left to present the decision of the committee, then state in his post-meeting news conference that he disagreed and tried but failed to persuade his cohorts to vote for a cut?
Not likely, say those familiar with inner FOMC workings, primarily because it would serve to further undercut Warsh's credibility.
"That would undermine his power as chair. Part of the job of chair is you get the committee to reach a consensus." said Mester, the former Cleveland president.
While there's a perception that Fed officials enter the meeting room and then hash out positions, Mester, who served in various capacities at the Fed from 1985 until 2024, said it doesn't really work that way.
"Chair Powell and the chairs before him, Ben [Bernanke] and Janet [Yellen], they both made a point of calling each participant right before the meeting so they would know where people are," she said. "The driving towards consensus is part and parcel of the setup of the FOMC." Former Governor Miran, who leaves the board with Warsh's arrival, said in a Bloomberg News interview earlier in the week that "it's important to understand that people at the Fed are responsive to arguments." Though he voted against each of the rate decisions at the six meetings he attended, Miran noted that other officials "started to respond" to his contrarian arguments "but it takes time." Those who worked with Warsh say he's up to the job, despite less-than-ideal circumstances surrounding the current Fed climate.
In addition to basic matters of rates, the new chair faces additional communications challenges.
He has spoken out not only against providing guidance, but also the Fed's vaunted "dot plot" of individual officials' rate expectations and even has shown misgivings about hosting news conferences after each meeting, a process that Powell began that deviated from the prior practice of quarterly meetings with the press.
Bill English, former head of monetary affairs at the Fed and now a professor at Yale, served with Warsh and deemed him "good at working with people, and I think he'll try to find a reasonable consensus" among the myriad issues ahead.
"At least from what I saw years ago when he was a governor, he just doesn't seem like the sort of guy who's going to want to pick a fight with the committee," English said. "My guess is he's going to want to continue to be a chair who's going to try to find consensus and move the committee over time with arguments and with data." Got a confidential news tip? We want to hear from you.
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