Kevin Warsh may be gearing up for the toughest job in the US government as new chairman of the Federal Reserve: He needs to stay true to his rep as a hawk on inflation — while at the same time playing nice with the guy who just nominated him.
The latter happens to be President Trump, whose instincts are to rev the economy to 6% growth and worry about inflation later.
His instincts are also to jawbone any Fed chair to make that happen even if it means slashing interest rates to zero.
If anyone can walk this very precarious line, it’s Kevin Warsh.
That’s because Warsh has been preparing for this day for at least a couple of decades.
He knows the Fed has been on dangerous ground in recent years straying from its “dual mandate” to maintain low inflation while it seeks strong employment in controlling the nation’s money supply.
After all the drama over Trump’s decision, it’s time not only for relief but also celebration.
The first time I met Warsh was in 2008.
The economy was on the precipice.
He was a Fed governor, one of the key officials at the central bank making sure the US economy didn’t implode in a 1930s-style wipeout as the banking crisis was cascading through the financial system.
Warsh had some government experience, but he really cut his teeth as an investment banker at Morgan Stanley, with real-world knowledge of what the financial sector means to the overall economy.
He and Tim Geithner, the New York Fed chief who was soon to become President Obama’s Treasury secretary, working alongside President George W. Bush’s Treasury Secretary Hank Paulson and then Fed Chair Ben Bernanke, saved the banking system and the economy from Armageddon by flooding the system with cheap money when it needed it most.
What Warsh did next, in my opinion, was even more important.
Effectively, he cast himself as a Cassandra, warning that a policy that worked well in the middle of a crisis was now setting the economy up for runaway inflation, the most important concern for any Fed chair.
Now decamped to Stanford University as an academic, he began firing off columns on the need to rein in the Fed.
He saw — and rightly criticized — Bernanke, then Janet Yellen and the current Fed chair, Jerome Powell, who was appointed during Trump 1, for continuing to juice the economy, printing money and steering longer-term interest rates lower as if they were part of the White House’s economic team.
He took aim at the central bank’s ever-broader policy pursuits, its support of lefty social issues, stuff like Diversity Equity and Inclusion hiring practices, and Environmental, Social, Governance investing.
This wasn’t just because DEI was illegal, and ESG was foolhardy, it was also because the Fed in taking these left turns also took its eye off the inflation ball and its mandate as the nation’s central bank.
By the Biden years, with Powell still in charge and still printing money, Warsh’s prognostications were an unfortunate reality.
Inflation raged to 9%, a noxious tax on the working class that doesn’t have the disposable income to speculate around its ravages with financial assets.
Finally, Powell stopped printing money and raised rates, but the damage was done. With so much money sloshing around, prices remained elevated (as they do today), which is why Donald Trump, warts and all, would have defeated Joe Biden and did beat Biden’s equally economically illiterate vice president, Kamala Harris, in the 2024 presidential election.
Didn’t listen to the pro
Yes, average folks tend to look past indictments and mean tweets when stuff like food, housing and energy becomes unaffordable because the president and his policymakers didn’t listen to Kevin Warsh.
The question is, will Trump will listen?
Warsh, once confirmed by the Senate, will take over when Powell’s term ends on May 15.
Inflation remains elevated above its target rate of 2%, but Trump wants lower rates, which makes his pick of a hawk like Warsh an odd one.
Recall, Warsh beat out one-time Trump favorite Kevin Hassett, chief of the president’s National Economic Council, who seemed prepared to run the most accommodative Fed in years.
One reason Trump went with Warsh, I am told, is that the president listened to Wall Street and heard you can’t have a patsy at the Fed willing to inflate the economy at all costs if you want people to buy your debt, and Warsh is pretty far from a patsy.
Plus, Warsh will meet Trump halfway.
Yes, he will address the president’s obsession for lower short-term rates that the Fed controls, but Warsh knows the real interest rates that matter are those on the 10-year Treasury, to which consumer borrowing rates are pegged and which is controlled by bond traders who hate inflation.
With that in mind, Warsh will thread the needle, lowering short-term rates while he downsizes the Fed’s massive balance sheet, essentially taking all that extra money out of the economy to appease bond traders as he sells the central bank’s large portfolio of debt retained during Powell’s money-printing spree.
It will keep a lid on the 10-year yield and hopefully bring inflation closer to its target rate.
It will be a balancing act, but if anyone can do it, it’s Kevin Warsh.
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