Trump's choice of Warsh to lead Fed could reshape the world's most influential central bank

WASHINGTON: President Donald Trump's nomination of Kevin Warsh to chair the Federal Reserve could bring about sweeping changes at a central bank that dominates the global economy and markets like no other.

Warsh, if approved by the Senate, will be under close scrutiny from financial markets and Congress given his appointment by a president who has loudly demanded much lower rates than many economists think are justified by economic conditions. Whether he can maintain the Fed's long time independence from day-to-day politics while also placating Trump will be a tremendous challenge.

Still, former associates and friends of Warsh say that he has the intellectual heft and people skills to potentially pull it off. His family also has connections to Trump that could reduce the pressure from the White House.

Warsh has “a judicious temperament and both the intellectual understanding but also the hopefully diplomatic talents to navigate what is a challenging position at this point,” said Raghuram Rajan, an economics professor at the University of Chicago and formerly head of India's central bank.

Warsh would replace current chair Jerome Powell when his term expires in May. Trump chose Powell to lead the Fed in 2017 but this year has relentlessly assailed him for not cutting interest rates quickly enough.

"I have known Kevin for a long period of time, and have no doubt that he will go down as one of the GREAT Fed Chairmen, maybe the best,” Trump posted on social media Friday (Jan 30). “On top of everything else, he is ‘central casting,’ and he will never let you down.”

Trump said later Friday in the Oval Office that he didn't ask Warsh to commit to cutting rates, calling such a question “inappropriate" and adding, “I want to keep it nice and pure.”

But Trump added, “But he certainly wants to cut rates.”

The appointment, which requires Senate confirmation, amounts to a return trip for Warsh, 55, who was a member of the Fed's board from 2006 to 2011. He was the youngest governor in history when he was appointed at age 35. He is currently a fellow at the right-leaning Hoover Institution and a lecturer at the Stanford Graduate School of Business.

In some ways, Warsh is an unlikely choice for the Republican president because he has long supported higher interest rates to control inflation. Trump, by contrast, has said the Fed’s key rate should be as low as 1 per cent, a level few economists endorse, and far below its current level of about 3.6 per cent.

During his time as governor, Warsh objected to some of the low-interest rate policies that the Fed pursued during and after the Great Recession of 2008-09. He also often expressed concern at that time that inflation would soon accelerate, even though it remained at rock-bottom levels for many years after that recession ended.

More recently, however, in speeches and opinion columns, Warsh has voiced support for lower rates, seemingly coming in line with Trump's point of view.

MARKETS AND MEMBERS OF CONGRESS REACT

Financial markets reacted in ways that suggest investors expect Warsh could keep rates a bit higher over time. The dollar and yields on long-term US Treasurys ticked higher. US stocks fell about 0.5 per cent. The biggest moves were in the volatile metals markets, where gold dropped more than 5 per cent and silver sank more than 13 per cent.

In Congress, Sen. Thom Tillis, a North Carolina Republican, reiterated in a social media post that he will oppose Warsh's nomination until a Justice Department investigation into Powell is resolved.

Tillis is on the Senate committee that will consider Warsh's nomination.

He added that Warsh is a “qualified nominee,” but stressed that “protecting the independence of the Federal Reserve from political interference or legal intimidation is non-negotiable.”

Tillis’s opposition could complicate the confirmation process. Asked late Thursday whether Warsh could be confirmed without Tillis’s support, Senate Majority Leader John Thune said, “probably not.”

Separately, Democratic Sen. Elizabeth Warren of Massachusetts, the highest-ranking Democrat on the committee, accused Warsh of reshaping his views to appease Trump ahead of his nomination.

“I don’t know how to interpret that, except to say, that’s exactly what a sock puppet does,” she said. “If Donald Trump says it, then Kevin Warsh echoes it, even though it contradicts everything he had done for years.”