President Trump’s nomination for the next Chair of the Federal Reserve has been one of the most anticipated appointments in modern history, particularly given that the President in recent months has crossed a putative red line. That red line is the independence of the Fed, undergirded by an unwritten rule that the president should not interfere in monetary policymaking but leave those decisions to a group of independent experts charged with a clear mandate and given the necessary tools.
Under the circumstances, the President’s choice of Kevin Warsh as the next Fed Chair is an interesting one—and a good one, I think. Warsh was a governor of the Federal Reserve from 2006 to 2011, and he was a strong contender for the job in 2018 when President Trump opted instead for Jerome Powell. Not only does Warsh know the Fed and monetary policymaking inside out, he has strong views on both and can be expected to put his imprint on them. How successfully he does so will impact not just the Fed but central banks and monetary policymaking around the world.
Warsh has been critical of the Fed for being too activist and steering too far from its core mandate and for being myopic and too beholden to financial markets. Warsh has not been shy about making his views known over the years; a good primer for those with an hour to invest would be to watch his G30 Spring Lecture at the IMF/World Bank Spring Meetings last year (I ask a question around the 47m 20s mark).
Financial market participants will be keenly focused on whether Warsh will bend to President Trump’s calls for Jerome Powell’s successor to cut interest rates and keep them low. The constitutional reality is that it makes little sense for a president to choose a Fed chair based on the level of interest rates they favor now; rather, personal chemistry and other factors aside, the best a president can do is choose a candidate based on that person’s framework for assessing the appropriate level over time as economic circumstances and the outlook change. I suspect that Warsh knows his history well enough and is too savvy to see himself go into the history books as a modern-day version of Arthur Burns, Richard Nixon’s (perhaps a little unfairly) notorious Fed Chairman in the 1970s.
Warsh stands to bring a thoughtful and humbling approach to the Fed, but I detect one potential blind spot in his thinking: the more modest and circumscribed the Fed is in its monetary policymaking ambitions and practice, the more implied leeway there is for other government policies—fiscal, structural and regulatory—to hold sway. It is one thing for the Fed to try to trim its wings, but, when push comes to shove, will the rest of the government and the markets let it?
For many years I have put forward a heretical view that, with the right institutional tweaks, it should be possible—and it would be beneficial—for the Fed to communicate and even coordinate more explicitly with the rest of the government without sacrificing its all-important monetary policy autonomy (see the Wall Street Journal letters “Trump Had More Than a Point on the Fed” and “Does the Central Bank Need a New Mandate?” for a flavor). One thing I will be watching for is whether a Warsh-led Fed sticks to its conventional arms-length “last mover” approach or whether it starts to embrace the notion that Fed independence does not mean Fed isolation.
Featured Author:
Dr. Paul Sheard, a noted Australian-American economist and policy-watcher based in New York, is the author of the Wall Street Journal bestselling business book, The Power of Money: How Governments and Banks Create Money and Help Us All Prosper.
All views expressed by members are their own and not reflective of the views of the Bretton Woods Committee.