(Image credit – Hoover Institution)
When choosing his pick for the chair of the Federal Reserve in 2017, Donald Trump was clear in his criteria: he wanted a Republican and a low-interest-rate person. Kevin Warsh was both, but his youthful good looks and the spelling of his surname proved too irritating for the president to handle, according to a report by the Wall Street Journal.
Trump instead chose the more experienced Jerome “Jay” Powell, who would be responsible for stewarding the long-term interests of the US economy, controlling inflation and managing unemployment.
The appointment soured quickly. After assuming office in February 2018, Powell continued raising interest rates in response to a strengthening economy and announced that the Fed would reduce its asset portfolio from $4.5 trillion to between $2.5 and $3 trillion over four years, a process known as quantitative tightening. Trump publicly criticised both decisions and even expressed early second thoughts on the appointment. That friction never fully resolved, and only escalated across two presidential terms, with Trump most recently branding Powell a “numbskull” and “incompetent.”
Powell faced a criminal investigation initiated by the Department of Justice into allegations that he misled Congress regarding a $2.5 billion renovation of the Fed’s headquarters. The investigation, which has since been dropped, became a major point of contention for many who viewed it as an act of outright intimidation and an attack on the Fed’s independence.
However, after nine fractious years, Powell’s time in the firing line is finally over. His term as Fed chair ended on the 15th of May, and while he can remain on the Board of Governors until 2028, his successor has already been confirmed. Eight years after being passed over, Kevin Warsh is finally the right man for the job.
As the Banking Act of 1935 dictates, after the president has chosen the chairman from among the sitting governors, the Senate must give its consent to the appointment. Republican Senator Thom Tillis, a member of the Senate Banking Committee, had initially withheld his support for Warsh’s nomination due to a criminal investigation into Powell, citing concerns over the Fed’s independence.
However, with that investigation now closed, the Senate confirmed Warsh in a 54-45 vote, clearing the way for him to be sworn in as Fed Chair on the 22nd of May.
Who is Kevin Warsh?
Born in New York, Warsh earned degrees from Stanford and Harvard before joining Morgan Stanley’s mergers and acquisitions team in the 1990s. In 2002, President George W. Bush appointed him as a special assistant for economic policy, and by 2006, he had become the youngest person ever appointed to the Fed’s Board of Governors, at just 35.
Serving between 2006 and 2011, Warsh built a reputation for hawkish monetary policy while acting as the board’s key bridge to Wall Street and the G20 during the financial crisis and its aftermath. Where his colleagues increasingly prioritised stimulus, Warsh remained focused on the longer-term distortions that loose monetary policy creates: misallocations of capital that, in his own words, “tend to linger for years in plain sight until they emerge with force at the most inauspicious of times.”
His opposition to successive rounds of quantitative easing was rooted in that concern. Cheap money, he argued, would inflate asset prices, suppress productive investment, and store up structural instability rather than resolve it. Research published by the Institute for New Economic Thinking found that while QE’s effects on employment and mortgage refinancing had some equalising impact, these were significantly outweighed by the disproportionate effects of rising equity prices, a finding that aligns closely with Warsh’s critique. The top decile of households, which hold a disproportionate share of financial assets, captured most of those gains, while the bottom half of earners saw comparatively little benefit from a decade of loose monetary conditions.
The 2010s largely vindicated that view in aggregate, too: the S&P 500 returned an average of 13.6% annually across the decade. In comparison, the share of aggregate wealth held by upper-income families rose from 60% to 79% between 1983 and 2016, while the share held by middle-income families was cut nearly in half.
It is worth noting that this 33-year window spans multiple policy regimes and cannot be simply attributed to QE alone, but research on the QE period specifically does find that equity price appreciation was the dominant channel through which wealth inequality widened after 2008, lending the longer-term data more credibility as a backdrop to Warsh’s argument.
When pandemic-era fiscal and monetary stimulus flooded the system simultaneously, a Fed already conditioned to loose policy was slow to tighten. The consequence was severe: US consumer prices rose 9.1% in the twelve months to June 2022, the largest annual increase since 1981. Warsh had been identifying that fault line for years. In 2023, reflecting on the collapse of Silicon Valley Bank, he argued that “a decade-long period of free money, negative real interest rates, and large asset purchases by the world’s central banks leads to deep complacency in financial markets, among regulators, and market participants.”
Warsh has not, crucially, remained ideologically fixed. At his Senate confirmation hearing this month, Warsh made his case that the Fed has lost its credibility with markets and the public, calling for “regime change” and committing to sharply lower interest rates. He has argued that this is not a contradiction of his earlier hawkishness but an extension of it: by reducing the Fed’s balance sheet, currently standing at $6.7 trillion, he believes there would be less liquidity in the system and therefore less inflationary pressure, which would in turn create room for lower short-term rates.
That position is not without sceptics. Aditya Bhave, head of US economics at BofA Securities, has argued that Warsh’s stated outlook is “much more consistent with an extended hold than additional cuts,” suggesting the market may not see the rate reductions Trump is anticipating anytime soon.
That gap between presidential expectation and market reality is precisely what makes Warsh’s position so delicate: close enough to Trump’s demands to survive confirmation, independent enough to retain credibility with investors.
On the political logic of the appointment, Michael Lebowitz, Chartered Financial Analyst at Real Investment Advice, explained:
“The reason Trump is going with Warsh is that the bond market wouldn’t have been happy any other way.”
Warsh will begin his tenure at a moment when the Fed’s credibility, and above all its political independence, is under intense scrutiny. Sustained public pressure from the executive branch to cut rates has raised concerns that monetary policy could be leveraged for short-term political gain.
Political interference at the Fed is concerning but not a new concept. President Lyndon B. Johnson engaged in significant and intimidating efforts to interfere with the Fed to force lower interest rates during the 1960s. This pressure was driven by his desire to fund the Vietnam War and his Great Society programs without significant tax hikes, while also trying to keep the economy booming before the 1968 election.
Citing these examples, Lebowitz does not believe the Fed is fundamentally at risk:
“The President is always invested in seeing the Fed Chair act in the President’s interests, while the Fed Chair is focused on the economy and not the President. I don’t think the Fed is really losing its independence. I think we’re just in a hostile period.”
This hostile period will have to be carefully navigated by Warsh, who will have to manage Trump’s volatile personality and his difficult track record with senior appointments. Warsh’s background, however, may make him better placed than his predecessor to navigate that relationship. Powell came from private equity and didn’t have much government experience, whereas Warsh has been inside the Fed during a crisis. Warsh has extensive experience around politicians and might have garnered the necessary ability to word things in ways that keep Trump onside and happy.
Trump might be the key reason for the appointment, but Warsh’s impacts will be felt far beyond Wall Street. Lebowitz explains that how Warsh impacts the dollar is what matters most:
“If the dollar appreciates, it makes things more expensive for you in the UK; if it depreciates, it makes them cheaper. When you change rates, that has an impact on currencies, and if the US starts lowering rates aggressively, it almost forces other countries to follow, or the currency relationship gets out of whack. For investors and economists thinking about Warsh’s impact, the answer is really the currency.”
For British consumers, this dynamic plays out most concretely in the price of dollar-denominated energy. The UK imports around 44% of its oil products and 45% of its gas supply, and because oil is globally priced in dollars, sterling depreciation feeds directly into household energy costs. When sterling fell from $1.40 in 2021 to around $1.20 in 2022, the UK’s total energy import bill more than doubled to £117 billion, equivalent to £4,200 per household. Such shifts exemplify how Warsh’s potential changes to U.S. interest rates could lead to far-reaching consequences, particularly for countries reliant on dollar-denominated commodities.
