There are a few things that could make life easier for Kevin Warsh in his first few months at the central bank, and President Trump keeping to his lane is likely top of the list.
The Federal Reserve has weathered unprecedented attacks from the White House since President Trump returned to office last year. Trump has, at various points, threatened to fire former chairman Jerome Powell, attempted to remove Governor Lisa Cook from post, resulting in a Supreme Court case, and launched a Department of Justice investigation into Powell—all amid a pressure campaign aimed at lowering rates.
Speaking to CNBC yesterday, the president said of Warsh: “He’s a great guy and a great pro, and I know where he’d like to be, but he has to do what he has to do.”
While flattery from the president may be a win for some, it’s not helpful for Warsh, whose credibility relies on him being viewed as independent. The suggestion that the president is in-the-know about what the chairman would like to do with rates is unlikely to be helpful.
Trump’s attacks on the Fed’s independence meant that anyone Trump nominated for Federal Reserve chairman would be viewed as a “sock puppet”—meaning the early days of Warsh’s return to the central bank needed to be handled delicately to reassure markets and investors of the institution’s autonomy.
Warsh, a former Fed Governor, has insisted he has made no promises to the president—or anyone else—about the path of monetary policy. Additionally, he told the European Central Bank Forum (following the U.S. Supreme Court decision in favor of Governor Cook) that the vibrancy of the American economy is “because of the constitutional design in the U.S.”
Nevertheless, the president has continued to criticize the policy stance of the Federal Open Market Committee (FOMC) and vowed to continue the push to have Governor Lisa Cook removed.
Although Warsh presented a unanimous view from the committee at his first press conference in June (which markets like to see because it gives them confidence in policy), Trump claimed that Warsh is dealing with a board that is “maybe a little bit hostile” and wants “to do the wrong thing.”
The new chairman said the opposite: In his June press conference, Warsh said he had “been especially heartened by the warm welcome of old friends and new colleagues, both, and I’ve listened closely to my fellow FOMC members.”
One doesn’t have to look far to understand why Warsh is keen to untangle the Fed from politics: Arthur Burns is widely considered the “worst” Fed chairman in history, overseeing a period of stagflation (high inflation and low growth) in the 1970s in part because, historians say, he was too weak to stand up to President Richard Nixon in the White House.
Despite this history lesson, Trump lamented a perceived change in FOMC thinking: Once upon a time, he believes, economic growth was supported by the Fed courtesy of low interest rates. Now, he says, growth is stifled because the Fed is preoccupied with its inflationary effect.
“That’s how we built the country,” Trump said. “Now you announce positive things, and they want to bring it down by raising interest rates, and it shouldn’t be that way. It should go back to the way it was.”
A significant omission here is that the Fed is not targeted on economic growth: Its congressional mandate is for maximum employment, price stability, and moderate long-term interest rates. Should economic growth threaten one of those aspects, the FOMC is employed to move in order to deliver its objectives.
The Cook question
Speaking in Portugal this week, Warsh seemed keen to move the Fed through judicial entanglements and get on with the task at hand.
The Supreme Court ruled 5–4 on Monday that President Donald Trump was wrong to try to oust Fed Governor Lisa Cook last August because she didn’t receive due process.
Warsh confirmed he had read the opinion on his flight to Europe, and said, “I believe in Article 3 judges. I believe in the rule of law. We’ll follow the Supreme Court decision, but day-to-day, the decision reaffirms … We are calling balls and strikes as best we can. We’re taking the reform objective seriously, and we’re going to deliver on the high promise that Congress gave us to deliver price stability in the context of our dual mandate.
“When we do that, we don’t have to worry about politics. We don’t have to worry about judicial intervention. We get to look in front of us because it’s a challenging step.”
The path ahead for the Fed may still include both some politics and some judicial intervention. Trump told CNBC that the case was sent back because of “process and procedure” and that he intended to win it.
