Trump’s Fed Pick Warsh Walks Tightrope Between Lower Rates and Tighter Money

Korea Economic Daily

Summary

Warsh’s nomination as the next Fed chair triggered a tightening scare, with interest rates surging and small-cap stocks and cryptocurrencies tumbling.
Warsh has argued that interest rates should be cut faster to support the productivity revolution driven by AI, while also signaling he could halt the Fed’s “money-printing machine” and pursue quantitative tightening (a reduction in QE).
The market sees Warsh as a figure who must walk a fine line between Trump’s calls for lower rates, Fed independence, and the unusual policy mix of rate cuts and quantitative tightening.

Forecast Trend Report by Period

Kevin Warsh, President Donald Trump’s nominee to chair the Federal Reserve, faces a Senate confirmation hearing on April 21, roughly three months after his nomination. With Warsh largely absent from public view for nearly six months, investors are focused on what he will signal about the future path of monetary policy.

Warsh has long been regarded as a traditional inflation hawk who emphasizes price stability and has criticized the Fed’s use of quantitative easing. When Trump nominated him in late January, Treasury yields jumped while small-cap stocks and cryptocurrencies slid in what amounted to a market tightening scare, fueled by concern that a Warsh-led Fed could pursue quantitative tightening.

Since Trump took office, however, Warsh has also criticized the Powell-led Fed for misjudging the causes of inflation and keeping interest rates too high. He argues that rates should be cut faster to support the productivity revolution driven by artificial intelligence. That has left markets uncertain whether he would be the dove Trump wants to deliver lower rates quickly, or the hawk who would halt the Fed’s swollen “money-printing machine,” as Warsh has described it, and press ahead with quantitative tightening.

In remarks released ahead of the hearing, Warsh restated his long-held view that “inflation is the result of Fed choices” and said the central bank should refocus on its core duty of price stability. At the same time, he said he does not believe comments from elected officials, including the president, on interest rates threaten the Fed’s independence. “The Fed’s independence depends on itself,” he said. That amounts to a rebuttal of market concerns that Trump’s public pressure on Fed Chair Jerome Powell to cut rates, along with threats to fire him, has undermined the central bank’s independence. The Financial Times said Warsh could become Trump’s next “fall guy” as he tries to navigate between the president’s demand for lower rates and the market’s desire for an independent Fed.

Warsh could become the richest Fed chair in history, while also being one of the most technology- and crypto-friendly. In Wall Street Without Gaps, Bin Nan-sae examines who he is, the logic behind his unusual policy mix of rate cuts and quantitative tightening, and why some see him as Trump’s next possible scapegoat.

Bin Nan-sae, New York correspondent, Hankyung.com, binthere@hankyung.com