MNI: Trump Names Kevin Warsh New Fed Chair

U.S. President Donald Trump said Friday he will appoint former Fed Governor Kevin Warsh to replace Jerome Powell as chair of the Federal Reserve when his term expires in May, capping off a year-long search that left financial markets on edge about a the risk of a loss of Fed independence. 

With the appointment of Warsh, Trump has chosen someone whose experience is widely seen as making him a credible steward of monetary policy, compared with the other top candidate Kevin Hassett, whose recent role as chair of the president’s National Economic Council made him appear too close to politics for the role of Fed chief. 

Warsh has had to overcome the perception that he is an instinctive hawk, especially because of his vocal opposition to the Fed’s second and subsequent rounds of large-scale asset purchases during the Great Financial Crisis, during which he was then-chair Ben Bernanke’s right hand man in navigating the market turmoil.

A lawyer by training and a long-time investor, most recently at Duquesne Family Office, Warsh is not a PhD economist and has vowed to lessen the central bank’s reliance on traditional Phillips curve models of the economy. He has criticized the Powell Fed for lacking a coherent reaction function. 

He told MNI in October that the Fed should shrink its balance sheet in order to disentangle itself from fiscal affairs and create more room to lower interest rates and boost the real economy. 

“The Powell Fed cut rates last September and mortgage rates went up a full percentage point. That's further evidence the Fed needs regime change, including a new operating framework. When the Fed cuts rates, they should actually go down.” 

Warsh has also vowed to enact substantial reforms in the regional Fed system. He would seek to reduce the amount of duplicative work done at the 12 regional banks, which Warsh thinks would be more useful as distinct centers of excellence focused on specific issues that are key to the Fed's function -- inflation, employment, financial stability, payments and more. (See MNI POLICY: Regional Fed Banks Could Face Revamp Under Warsh)

Warsh would also likely take significant steps on policymaker communications and forward guidance, likely de-emphasizing or perhaps even ditching the Summary of Economic Projections or "dot plot" that markets closely follow. (See MNI POLICY: Warsh Could Reshape Fed On Rates, Communication) A Warsh Fed would also likely take steps to move away from the Beige Book report as it is currently compiled, because it is too anecdotal and inexact to be a useful guidepost for policy.

The president’s nominee has argued for a new Treasury-Fed accord that would lead to better coordination but also a clearer delineation of powers and duties.

“In a potential new accord between the Fed and the Treasury, the Fed's grand ambitions and bloated balance sheet would be checked,” he said. “The Fed's assets would be reduced in size and scope, and it would materially lower interest rates. And Secretary Scott Bessent's fiscal and regulatory authorities would be strengthened to carry out the president's policies. The real economy would benefit enormously."