Kevin Warsh will take the helm of the Federal Reserve amid deep questions about his independence, plans to shrink his balance sheet and ability to cut interest rates, according to the latest CNBC Fed poll.
Just 50% of respondents believe that Mr. Warsh runs monetary policy with little or no independence, compared to 46% who say that Mr. Warsh is somewhat or not independent at all.
Confidence in his independence is 13 points higher than last month, which is a major concern. That suggests Mr. Warsh may have won over a few observers with his Senate confirmation last week.
Economist Hugh Johnson said: “My hope and expectation is that Mr. Warsh will maintain his independence as chairman.” “I’m more hopeful than hopeful, but we’ll see.”
The survey of 26 economists, strategists and analysts was conducted last Thursday and Friday after Warsh’s nomination hearing on Wednesday.
At his hearing, Warsh vowed to maintain the Fed’s independence in monetary policy. But he added that he is “committed to working with the administration and Congress on non-monetary issues that are part of the Fed’s mandate.”
Mr. Warsh’s confirmation cleared a key hurdle last week when U.S. Attorney Jeanine Pirro in Washington, D.C., referred an investigation into the renovations to the central bank’s headquarters to the central bank’s inspector general, seemingly ending the criminal investigation. A Senate Banking Committee vote is scheduled for Wednesday.
Cooperation with the Ministry of Finance
Mr. Warsh has spoken in the past about the agreement between the Treasury and the Fed on the size and composition of the balance sheet.
“One of the early indicators of a real threat to that independence will be the extent to which Mr. Warsh and Mr. Bessent intend to remake the 1951 Treasury and Fed agreement that separated debt management from monetary policy,” said John Donaldson, director of fixed income at Haverford Trust.
Mr. Donaldson added that Mr. Warsh was unlikely to break that agreement.
On interest rates, 58% say Mr. Warsh will be dovish, or in favor of rate cuts, up 14 points since March, and 65% say he will be more hawkish on balance sheets, up 9 points, meaning he is likely to reduce the Fed’s bond holdings.
Among those who believe Mr. Warsh will reduce the Fed’s $6.7 trillion balance sheet, the average reduction in the first year is expected to be about $800 billion. However, opinions are divided on whether or not it is possible to reduce emissions, with 46% saying they will not make any reductions in the first year, while 41% say they can.
Mr. Warsh and Treasury Secretary Scott Bessent have both called for reducing the balance sheet over time.
However, there is debate over what impact that will have, with 46% believing that balance sheet reductions would be detrimental to efforts to keep interest rates low and 38% believing balance sheet reductions would be negative for economic growth. A third of respondents think it will have a negative impact on the stock market, while 38% say it has no impact and 13% think it will have a positive impact.
One of the biggest disagreements is how the Fed should handle artificial intelligence productivity.
Warsh said the Fed shouldn’t wait until the data reflects it, and that policymakers need to make “bets” on the impact ahead of time.
Respondents disagreed, with 81% saying the Fed should not incorporate AI productivity into policy until it actually shows up in the data.
“Even if AI has the potential to reduce inflation in the long run, it would be hard to argue for short-term Fed easing,” said economist Jack Kleinhenz, senior economic adviser at the National Retail Federation. “We expect inflation to rise in the short term.”
