(Yahoo!Finance) - Opting for a conventional choice to lead the Federal Reserve, President Trump on Friday nominated former Fed governor Kevin Warsh to be the next chair of the central bank and succeed Jerome Powell.
"I have known Kevin for a long period of time, and have no doubt that he will go down as one of the GREAT Fed Chairmen, maybe the best. On top of everything else, he is 'central casting,' and he will never let you down," Trump said in his announcement, which he posted to Truth Social.
Warsh has experience navigating the central bank. President George W. Bush appointed him to serve as Fed governor from 2006 until 2011. He became former Fed Chair Ben Bernanke’s liaison to Wall Street during the chaos of the 2008 financial crisis. Before serving at the Fed, Warsh was special assistant to Bush for economic policy and an executive secretary at the National Economic Council, where he advised the president and senior administration officials on the US economy.
He has also worked in M&A at Morgan Stanley (MS). Warsh holds a degree in public policy from Stanford, as well as a law degree from Harvard. He is a known figure to Trump, who interviewed him for the Fed chair post eight years ago before selecting Powell — a choice Trump regretted almost instantly.
This time, Warsh prevailed over Trump's other finalists: current Fed governor Chris Waller, BlackRock chief of fixed income Rick Rieder, and National Economic Council Director Kevin Hassett.
A critic of the Fed
Warsh has been highly critical of the Fed in recent months, writing in an op-ed in the Wall Street Journal last year that the Fed should “discard its forecast of stagflation” and arguing that it is overlooking that AI will be a “significant” force that will boost productivity and push down inflation.
“He thinks you have to lower interest rates,” Trump said of Warsh recently, citing the president's key litmus test for the role.
Warsh has criticized Powell personally for making “unwise choices,” such as missing the persistence of post-pandemic inflation. Warsh has said he rejects the belief that inflation is caused by the economy growing too fast and workers getting paid too much. Rather, he argues inflation is caused by the government spending too much and printing too much money.
Warsh has also said he thinks the Fed should view tariffs as one-off price changes, a view echoed by the White House and many members of the Fed now.
"Economic growth in the US is poised to boom, but it’s being held down by bad economic policies coming from the central bank, bad supervision policies, bad monetary policies, and a very confusing set of standards as we’ve gone from last year to this year," Warsh told Fox Business in an interview last year.
As chair, Warsh will face a divided Fed. Many members feel the central bank has done enough with three rate cuts last fall, and further cuts aren't warranted unless the job market deteriorates further or inflation shows signs of decisively retreating.
Loretta Mester, former head of the Cleveland Fed, said that Warsh has “been exposed to and has engaged in the scholarly exchange of disparate views, which will serve him well in the chair role.”
“Kevin understands the importance of monetary policy independence, but he will be put to the test at some point,” said added.
'He will lean in the president's direction'
As the announcement of Warsh's nomination spread on Friday, bond yields inched higher and reaction was both mixed and measured, particularly on the hot-button topic of interest rates.
"We think Warsh is the kind of new chair who the old Committee will try to meet halfway if economic conditions permit — a core part of our thesis for two or three not one or two cuts this year," Evercore ISI analysts wrote in a note.
Wrote Christopher Rupkey, chief economist for FWDBONDS, "Slowly but surely, he will lean in the President’s direction, which favors dramatic interest rate cuts of at least one or two percentage points below 3% neutral. Savers beware. ... Warsh wouldn’t have gotten the job unless he had given the President his word that he would follow the Trump 2.0 economic agenda."
But Renaissance Macro Research head of economics Neil Dutta said Friday he's skeptical of Warsh's dovish posture of late.
"Because Warsh has been a policy hawk his entire life, his newfound dovishness looks very suspect. Powell might sense the same thing, which is why there is a risk of him sticking around. If he does, Warsh would be a very weak Fed Chair," Dutta wrote.
Powell's chairmanship is up in May, but he could choose to remain at the Fed as a governor.
Benson Durham, former senior staffer for the Fed and International Monetary Fund, said a few factors could persuade Powell to stick around, including Warsh’s calls for regime change at the central bank, the Justice Department's criminal investigation into Powell, and the Supreme Court case over Fed Governor Lisa Cook's firing.
“Although he couldn’t say so publicly, if I were the chosen Kevin, I would be encouraging Powell to stay on,” said Durham.
Powell's presence, he suggested, would lend legitimacy and help combat any appearance of the new chair trying to placate the president.
“Imagine a cut or even two with Warsh as chair and without a dissent from Powell, say. Risky, yes," Durham noted.
Warsh will have to undergo a confirmation process, which consists of a hearing and vote in the Senate Banking Committee and a full vote in the Senate.
Senate Banking Committee Chair Tim Scott said he looks forward to leading a "timely confirmation process that carefully examines his vision for focusing the Federal Reserve on its core mission."
"Federal Reserve independence remains paramount, and I am confident Kevin will work to instill confidence and credibility in the Fed’s monetary policy,” Scott added.
Sen. Thom Tillis, a Republican from North Carolina who sits on the Banking Committee, previously threatened to block Trump's nominee until the criminal investigation into Powell is resolved.
On Friday, he doubled down, even as he called Warsh "a qualified nominee with a deep understanding of monetary policy."
"My position has not changed," Tillis posted on X. "I will oppose the confirmation of any Federal Reserve nominee, including for the position of Chairman, until the DOJ’s inquiry into Chairman Powell is fully and transparently resolved."
By Jennifer Schonberger · Senior Reporter
