Interestingly, during this hearing, Warsh carefully avoided distancing himself from Donald Trump. In fact, his rhetoric was somewhat reminiscent of the US President's. Donald Trump constantly repeats that everyone who came before him was incompetent and that everything must be done differently.
Obviously, Warsh did not go as far as Trump. However, his criticism of Jerome Powell's tenure remains sharp, whereas incoming Fed chairs typically prioritize continuity. "The fatal policy errors made four or five years ago" constitute a legacy that households are still struggling to recover from, he said. "Inflation is a choice, and the Fed must take responsibility for it."
Change of course
In 2021, the Fed initially described inflation as transitory, delaying rate hikes. Subsequently, the institution implemented relatively rapid rate increases between 2022 and 2023, helping inflation to gradually subside. However, it is stabilizing at a level that is (too) high, and the Fed has been missing its 2% target for five years now.
More broadly, Kevin Warsh believes that the Fed needs a "change of course in the conduct of its policy." He advocates a new inflation-fighting framework, a reduction of the balance sheet, and better cooperation with the Treasury. Beyond the substance, Kevin Warsh wants to develop communication. He seems prepared to change the number of meetings (currently eight per year) and did not commit to holding press conferences after every meeting.
As we have often noted in the past, a Fed Chair does not decide monetary policy orientations alone. The FOMC has 17 members, 12 of whom vote at each meeting. The role of a Fed Chair is therefore always to build consensus. And criticizing everything your colleagues did before your arrival is not the best way to step into that role.
Returning to monetary policy decisions in the strictest sense, the consensus within the Fed is rather one of a prolonged status quo. Indeed, the rise in energy prices caused by the conflict in Iran is further delaying the decline in inflation hoped for at the beginning of the year. As former St. Louis Fed President James Bullard summarized: "It looks like the (Fed) Chair always gets what he wants, but that is because he maneuvers to stay at the center of the committee."
Hawk or Dove?
Ultimately, it is quite difficult to summarize Warsh's position on inflation. His past stances, notably during his term as a Fed Governor (2006-2011), placed him in the hawk category.
However, to appeal to Donald Trump, he has adopted a much more dovish tone and has expressed his wishes for further rate cuts. For several months, he has argued that the AI boom will enable disinflationary growth and enable the Fed to ease its monetary policy.
Yesterday, he suggested that the focus should instead be on the Dallas Fed's trimmed mean inflation. This measure excludes extreme data points and is moving closer to 2% than core inflation, the measure traditionally favored by the Fed. However, he did not call for immediate rate cuts. "The inflation trajectory is improving, but there is still work to be done."
Warsh also stated that he had not committed to Trump to lower rates. "The President never asked me to predetermine, commit, fix, or decide on any interest rate decision during our discussions, and I would never have consented to it."
On CNBC Tuesday, Donald Trump stated that he would be disappointed if his nominee did not immediately lower interest rates upon taking office. It is worth remembering that it was Trump who appointed Jerome Powell in 2017, before making him his favorite punch-bag.
A Deadlock
The main remaining question is when Kevin Warsh will take office. Jerome Powell's term ends on May 15, but there is no guarantee that the April 28-29 meeting will be his last.
Republican Senator from North Carolina, Thom Tillis, is blocking all Fed nominations until the judicial investigation into Jerome Powell is resolved. Yesterday, during the hearing, he was again very aggressive and worked to counter the Trump administration's arguments.
The situation appears completely deadlocked: Powell has indicated he will remain at the Fed until his successor is confirmed. Tillis will block the confirmation as long as the Department of Justice persists. Meanwhile, Donald Trump wants the investigation to continue. Questioned several times on the subject in recent days, the US President has made no concessions.
The deadlock could therefore last until the midterms, when Thom Tillis's senatorial term expires. He has already announced that he will not run for re-election (which is why he can afford to clash with the White House). Until then, no shift should be expected from him. "If you're asking me if I think Tillis is bluffing, the short answer is no. The long answer is a categorical no," his colleague from Louisiana, John Neely Kennedy, said.
