Key takeaways

  • President Trump will nominate Kevin Warsh, a former Fed governor, to be the next chair of the central bank.
  • Warsh has advocated for lower interest rates and a smaller balance sheet at the Fed.
  • Analysts expect markets to view Warsh as a credible choice and do not expect issues with his Senate confirmation.

With his choice of Kevin Warsh to lead the Federal Reserve, analysts say President Donald Trump is turning to an experienced official to steer monetary policy. But they will watch closely for any signs of Warsh bowing to pressure from Trump to lower interest rates more than needed.

After months of intense speculation, Trump on Friday announced his intention to nominate Warsh, a former Fed governor, to replace Jerome Powell as chair. Warsh has advocated for lower interest rates and reform, saying the bank is suffering from “mission creep.” Analysts think that could mean easier policy in the year ahead even if strong economic growth persists, but they add that Warsh’s track record of advocating higher rates to fight inflation might temper that posture.

Fed independence on rates in the spotlight

The nomination comes at an especially fraught time for the Fed. There are unusual policy divisions due to a muddy economic picture, with some members favoring lower interest rates to protect the job market and stimulate growth, and others preferring to hold rates to keep inflation from getting any higher. President Trump has repeatedly criticized Powell and the Federal Open Market Committee for not lowering rates more.

The Fed is also contending with questions about its independence and credibility. Earlier this month, the Supreme Court heard arguments over whether Trump can legally remove Governor Lisa Cook from her position at the central bank. The US Department of Justice has also issued subpoenas against the Fed and Powell in connection with the ongoing renovation of the central bank’s office buildings, which analysts have widely criticized as an overreach of executive power.

Who is Kevin Warsh?

Warsh is a fellow at the Hoover Institution at Stanford University. He worked on Wall Street at Morgan Stanley early in his career before serving on the National Economic Council and as a Federal Reserve governor under President George W. Bush.

Once known as a “hawk”—an advocate of tighter Fed policy—Warsh has aligned with Trump’s views in recent months, supporting lower interest rates and telling Fox News that Trump was right to be frustrated with Powell’s handling of policy. “The Fed’s track record under Chairman Jerome Powell is one of unwise choices,” he wrote in a Wall Street Journal op-ed this past fall, arguing for balance sheet reductions at the central bank. He’s also warned against “mission creep” at the Fed.

Natixis chief economist Christopher Hodge said in a Thursday note to clients that Warsh would likely be viewed as “fairly credible by the markets,” and that he “should have no problem being confirmed by the Senate.”

Luke Bartholomew, deputy chief economist at Aberdeen Investments, opines: “Warsh’s experience on the Fed, where he developed a reputation as a very competent crisis fighter with a good understanding of financial markets, and his long track record of independent thought about monetary policy mean he is a credible nomination.”

Hodge notes that Warsh is a supply-side optimist, meaning he believes policies like deregulation and tax cuts can spur productivity for the entire economy. That could be a justification to “rapidly lower rates,” he writes. But “if those productivity gains do not materialize and inflation remains sticky, Warsh would likely pivot to a more hawkish stance.”

James Angel, an associate professor of finance at Georgetown University’s McDonough School of Business, says Warsh “has the background and experience that we expect for a Fed Chair,” including “pedigrees from all the right places” and experience with the 2008 financial crisis as a Fed governor. “My only concern with any Trump appointee,” he explains, “is whether he promised Trump that he would bow down to him and lower interest rates too much to try to make things look good at election time.”

How will Warsh influence the Fed’s rate decisions?

In addition to pushing for lower interest rates, Warsh has criticized the Fed’s growing holdings of US Treasury debt as a worrying sign of its oversized impact on the path of the economy. He’s said that shrinking that balance sheet would make it easier to maintain lower rates.

However, analysts say that while Warsh may prefer lower rates for now, it’s not clear how much that stance will translate into Fed policy. “Once on the board, it is not certain how Mr. Warsh will vote,” wrote Samuel Tombs, chief US economist at Pantheon Macroeconomics, in a note Friday morning. “It’s reasonable to assume that he told the President he favors reducing interest rates today, otherwise he would not have been nominated ... But Mr. Warsh’s hawkish instincts might return once he has secured the Chairmanship.”

Warsh’s track record implies he may prioritize preventing runaway inflation over ensuring maximum employment in a crisis, Tombs explains. “In the event of persistent near-3% inflation, our instincts tell us Mr. Warsh will be more preoccupied with how history will view his record than with continuing to pander to the President. Easier-than-otherwise policy under Mr. Warsh is not a given.”

There are also committee dynamics within the FOMC, which has 12 voting members. “As chair, [Warsh] will almost certainly push for lower interest rates, consistent with our forecast of two 25-basis-point cuts later this year,” says Bartholomew of Aberdeen Investments. “But he is unlikely to make much progress in shifting the Fed’s operating framework and shrinking its balance sheet.”

Will the Fed cut rates soon?

The Fed left interest rates unchanged at its January meeting this week, with Powell arguing that rates are “within plausible estimates of neutral” (the level at which policy is neither restrictive nor accommodative).

Markets saw roughly 47% odds of a June interest rate cut after this week’s decisions, and those odds have not materially changed since Trump’s announcement. Bond futures traders are now pricing in a 48.5% chance of a rate cut in June, according to the CME FedWatch Tool.