What will Kevin Warsh’s Federal Reserve look like?

KEVIN GOT the nod, in the end. On January 30th President Donald Trump picked Kevin Warsh to lead the Federal Reserve. He bested a rival Kevin, Hassett (an earlier front-runner), Rick Rieder and Christopher Waller in the final leg of a months-long contest. Mr Trump lauded Mr Warsh’s lengthy CV. “On top of everything else”, wrote America’s reality-TV-star president, “he is ‘central casting’.”

His Wall Street looks aside, Mr Warsh seems a peculiar choice for a president on a crusade to lower interest rates. He made his name as a ferocious inflation hawk during his stint as Fed governor from 2006 to 2011. Bafflingly, he spent even the pits of the global financial crisis of 2007-09, when inflation was non-existent, fretting that prices might surge.

Now America really does have an inflation problem. It took a pandemic and colossal fiscal giveaways (which, to his credit, Mr Warsh opposed), but prices finally did get out of hand.  The Mr Warsh of two decades ago might have felt a touch of smug vindication. Instead, Mr Warsh now claims to be a rate-cutting dove of just the sort Mr Trump admires.

Mr Warsh explains this change of heart by pointing to the deregulatory genius of the president’s policymaking and the prospect of a productivity-enhancing boom in artificial intelligence. These forces, he argues, will wipe away whatever inflation lingers in the economy. The Fed need not fret and can happily lower rates to juice things.

Even if AI works productivity miracles (the jury is out) and the White House cuts red tape (its achievements have so far been less impressive than its pronouncements), waving away inflation today because of speculative productivity gains tomorrow is closer to wishful thinking than wise central banking. Still, markets seem relieved. Mr Warsh may be chameleonic but is not an unknown species and has real Fed experience. Bond yields have barely budged since he emerged as the clear front-runner the day before Mr Trump announced his pick. Stockmarkets barely noticed. Since Mr Trump was never going to put forward a business-as-usual nominee, investors have concluded that Mr Warsh is as close as it gets.

What would Mr Warsh’s Fed look like? Quantitative easing (QE) is out the window. Mr Warsh has never wavered in his hatred of the vast balance-sheet that the Fed accumulated through bond-buying. Conveniently, this aligns him with Scott Bessent, the treasury secretary, who oversaw the selection process for the Fed chair (and is himself a former protégé of Stanley Druckenmiller, Mr Warsh’s current boss at Duquesne Capital, a family office). Mr Bessent has compared QE to “gain of function” biological research, the sort that lab-leak enthusiasts blame for unleashing the covid-19 pandemic. It also dovetails with a growing consensus on QE—even stodgy central bankers, like Andrew Bailey at the Bank of England, have started voicing similar reservations.

Where Mr Warsh may clash with orthodoxy is on interest rates and, more troublingly, Fed independence. Mr Warsh will struggle to cut rates on his own: he casts only one of the 12 votes on the committee that sets them. Jerome Powell, the more hawkish current chair, may well stick around as Fed governor until his term expires in 2028 rather than leave when his chairmanship ends in May like most of his predecessors. Mr Warsh will thus almost certainly replace Stephen Miran, the Fed’s only out-and-out Trump lackey.

A more serious clash concerns the Fed’s independence. No president has been as meddlesome as Mr Trump in the seven decades since the central bank gained freedom from political interference. He constantly berates Mr Powell, and is trying to fire Lisa Cook, another Fed governor, over supposedly dodgy mortgage paperwork (which she denies), an effort the Supreme Court is likely to stymie. Even if Mr Warsh rediscovers his hawkish side once installed for a fixed term (invulnerable to presidential whim), questions about his impartiality will remain.

The defining moment of Mr Warsh’s career was the financial crisis, where he served as the Fed’s ambassador to Wall Street. During that episode and crises since, the Fed was a vital steady hand trusted by both parties and the markets. Appeasing the president while not disaffecting everyone else will require not just looks but acrobatic skill. Mr Warsh may be wishing he had a stunt double.■