BREAKINGVIEWS-An uncertain Fed awaits its unknowable new chair

By Gabriel Rubin

WASHINGTON, Jan 30 (Reuters Breakingviews) - Which Kevin Warsh will run which Federal Reserve? After prevaricating between two Kevins while launching unprecedented legal battles to sway the central bank, President Donald Trump has picked a replacement for Chair Jerome Powell. Warsh’s criticisms of current policy fit neatly with the administration’s whims. Yet this recent low-rates advocacy clashes with his long-held hardline stance on inflation risks. Such uncertainty may yet convince Powell to stick around. The best-case scenario is that institutional guardrails and hair-trigger markets constrain which version of the Fed’s new boss emerges.

Already a member of the central bank’s board of governors under former President George W. Bush, Warsh himself has had plenty of trouble predicting the future. The day after Lehman Brothers failed in 2008, as his colleagues scrambled to contain a growing crisis, he said he was “still not ready to relinquish my concerns on the inflation front.” In 2009, with U.S. growth tepid and unemployment soaring, he called to re-raise rates, even as the rate of price increases sank to 1%.

He earned respect for other work, like helping with JPMorgan Chase’s takeover of Bear Stearns and the government bailout of insurance giant AIG. Despite then-chair Ben Bernanke’s frustrations over Warsh’s criticisms of quantitative easing, the two developed a close working relationship. After losing the race to lead the Fed to Powell in Trump’s first term, he has had nothing but harsh words for the current bank chief.

Warsh blasted the Fed’s post-pandemic inflation-fighting record and perceived overreach on issues like diversity and climate change. As Trump’s obsession with achieving low rates became clearer, Warsh remolded himself as an easy-money champion, claiming that any economic overheating would be cooled by simultaneously shrinking the central bank’s balance sheet. Such cognitive dissonance may have won over Trump, but could prove a lightning rod for the Fed’s governors, who set the path of rates collectively.

After all, the key test of the central bank’s credibility is whether it can shrug off White House pressure. Powell has taken extraordinary steps to push back against Trump’s equally extraordinary moves to subordinate the Fed. Warsh’s seeming flip-flop may put his colleagues on alert for signs that the new chair is now taking orders.

Powell himself may be part of that dynamic. His chairmanship ends in May, but he can stay put as a governor until 2028. If he stays, the administration would have few chances to further remake the bank, since there would be no pending vacancies for years — assuming the Supreme Court blocks Trump from firing Governor Lisa Cook, and the Justice Department drops its frivolous criminal investigation of Powell. If it doesn’t, even Warsh’s nomination could be in danger, with Republican Senator Thom Tillis threatening a roadblock.

Bond markets, too, may restrain even a captured Fed by keeping longer-term rates, over which policymakers have less control, elevated. Perhaps Warsh will return to his academic roots and pursue fact-based, independent monetary policy. It would be far more reassuring if the nominee’s recent track record supported that hope.

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CONTEXT NEWS

U.S. President Donald Trump said on January 30 that he would nominate Kevin Warsh to chair the Federal Reserve.

Warsh, a sharp critic of the central bank under current Chair Jerome Powell, served as a Fed governor from 2006 to 2011, and since then has worked at Stanford University’s Hoover Institution.

If confirmed by the Senate, Warsh would take office in May 2026.