US President Donald Trump on Friday last week nominated former US Federal Reserve governor Kevin Warsh to succeed Fed Chair Jerome Powell, who Trump has repeatedly criticized for not cutting interest rates more swiftly.
That announcement capped a closely watched search for a new central bank head. Market observers had predicted that Rick Rieder, chief investment officer for BlackRock Inc’s global fixed income business, might get the job. If the US Senate confirms Warsh, many expect another rate cut in June, after Powell’s term ends in May.
At its first Federal Open Market Committee meeting of the year on Wednesday, the Fed kept its key interest rate unchanged in the range of 3.5 percent to 3.75 percent, following three consecutive quarter-point reductions late last year.
The decision was widely expected, and not unanimous, as two of the 12 Fed officials backed a quarter-point rate cut. At a post-meeting news conference, Powell left the door open for future rate cuts, but said there was no rush.
Economists considered Warsh as the safest choice of Trump’s Fed chair candidates, which also included Fed governors Christopher Waller and Michelle Bowman, as well as US National Economic Council Director Kevin Hassett.
After working in investment banking at Morgan Stanley, Warsh served as a Fed governor from 2006 to 2011 and was directly involved in monetary policy decisions during the 2008-2009 global financial crisis. Despite his long-standing tendency to be tough on inflation, Warsh has more recently talked about the need to lower rates, aligning with Trump’s stance.
According to CME Group Inc’s FedWatch tool, there might be short-term rate cuts under Warsh’s Fed, but no drastic rate adjustments in the long term.
In an op-ed published by the Wall Street Journal on Nov. 16, Warsh strongly criticized the current Fed leadership, saying it should reconsider its monetary policy and that artificial intelligence (AI) could serve as a powerful disinflationary factor. His position greatly differs from the mainstream belief held by Powell and others that inflation stems from an overheated economy due to excessive consumer spending, rapid economic growth and rapid wage increases, which requires raising borrowing costs to curb consumption and investment, thus cooling down the economy and ultimately lowering inflation.
To Warsh, the real cause of inflation lies elsewhere, the op-ed said.
Higher prices arise when the government overspends and prints excessive money, but domestic production capacity cannot keep up, as borrowing costs are too high, he said. Warsh’s solution is to let the Fed cut rates and encourage firms to invest and expand production. At the same time, the Fed would shrink its balance sheet to absorb excess funds from the market. In short, his strategy aims to channel capital from the market to the real economy, fundamentally addressing supply bottlenecks.
While traditional economic theory states that rate cuts could stimulate demand, potentially exacerbating inflation, Warsh said that a productivity revolution brought by AI could significantly improve corporate productivity and promote economic growth, and that supply-side-driven growth could alleviate inflation.
Warsh also hinted at potential reforms he might pursue if appointed as Fed chair, saying existing financial regulations restrict domestic banks too much and systematically discriminate against small and medium-sized banks, ultimately slowing the flow of funds to the real economy. He also expressed support for Bowman, the Fed’s vice chair for supervision, in designing a new regulatory framework to ease banking burdens.
Choosing a Fed chair is never merely a personnel change; it is a significant decision that signals the direction of US economic policy. Warsh’s economic blueprint — a path relying on supply-side reforms, embracing technological productivity and deregulating the financial system — outlines a direction drastically different from the existing one. To him, the Fed can combat inflation without sacrificing economic growth, and by supporting an AI-driven productivity shift, the US economy can achieve a balance between high growth and stable, moderate inflation.
His selection might not just affect the path of monetary policy trends, but also the engine of economic growth: the prudent management of demand or a significant increase in supply?
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