President Donald Trump has nominated Kevin Warsh to replace Jerome Powell as Federal Reserve Chairman. With the president’s push for low interest rates, Warsh is expected to become more supportive of lowering the Fed’s key benchmark interest rate later this year.
“I have known Kevin for a long time and have no doubt that he will go down as one of the great Fed Chairs, and perhaps one of the best Fed Chairs,” Trump said in a post on Truth Social on Friday.
Federal Reserve Board members are nominated by the president but must be approved by the Senate. If confirmed, Warsh would replace Powell at the end of his term in May, opening the door to a possible change in the direction of monetary policy into the second half of 2026.
Mr. Warsh, a former Fed member with a background in Wall Street, has criticized the central bank’s handling of inflation, telling CNBC in July that its reluctance to cut interest rates had damaged the central bank’s credibility.
“Based on his past statements and actions as a Fed director, Mr. Warsh was by far the most hawkish of the four final Fed chair candidates,” said Brett House, an economics professor at Columbia Business School.
President Trump said keeping the federal funds rate too high would make it harder for businesses and consumers to borrow, putting the United States at an economic disadvantage compared to countries with lower interest rates.
But after this week’s two-day Federal Open Market Committee meeting, the Fed left its benchmark interest rate unchanged and offered little relief to Americans struggling to withstand high borrowing costs.
The Fed’s benchmarks set the interest rates banks charge each other for overnight loans, but they also affect nearly all consumer borrowing and savings rates.
Generally, short-term interest rates, like credit card rates, are closely tied to the Federal Reserve’s benchmark. Long-term interest rates, such as mortgage rates, are significantly affected by inflation and other economic factors.
“There’s no one who’s going to be in this job who isn’t going to cut interest rates in the short term,” David Bahnsen, chief investment officer at Bahnsen Group, said on CNBC’s “Squawk Box” on Friday.
Kevin Warsh, economics fellow at the Hoover Institution and lecturer at the Stanford Graduate School of Management, speaks at the Thorne Investment Conference in New York City, USA, on May 8, 2017.
Brendan McDiarmid | Reuters
“It’s too early to judge Kevin Warsh as Fed chairman,” said Mark Higgins, senior vice president at Index Fund Advisors and author of “Investing in U.S. Financial History: The Past to Predict the Future.”
“But history is clear that keeping inflation high for too long makes it much harder and much more painful to put out the fire later on,” Higgins said.
In the 1970s, then-President Richard Nixon pressured Federal Reserve Chairman Arthur Burns to keep interest rates low and pump gas into the economy in the run-up to the 1972 presidential election.
Economists now say this set the stage for runaway inflation. Consumer prices soared over the next decade, and inflation reached around 15% in 1980, still the highest level since World War II.
The Fed, under new guidance, eventually raised interest rates to harsh levels to control inflation, leading to the high borrowing costs of the 1980s.
“The message to households is uncomfortable but important,” Higgins said. “History is clear on this point: It is better to accept shorter periods of deeper economic pain now than a prolonged period of inflation that continues to erode purchasing power.”
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