Kevin Warsh was handpicked to lead the world’s most important bank, with a remit from U.S. President Donald Trump to do one thing: lower interest rates. But economic reality, especially stubborn inflation, won’t allow the Federal Reserve to do that, and so it is now facing the wrath of both financial markets and the White House.
Add to that a novel, confusing, and contradictory communication style, and Warsh’s early steps as Fed chair have been less than encouraging. That is problematic when what the Fed says, almost as much as what it does, has huge implications for the United States and global economies.
Kevin Warsh was handpicked to lead the world’s most important bank, with a remit from U.S. President Donald Trump to do one thing: lower interest rates. But economic reality, especially stubborn inflation, won’t allow the Federal Reserve to do that, and so it is now facing the wrath of both financial markets and the White House.
Add to that a novel, confusing, and contradictory communication style, and Warsh’s early steps as Fed chair have been less than encouraging. That is problematic when what the Fed says, almost as much as what it does, has huge implications for the United States and global economies.
“Warsh doesn’t know how to speak coherently about monetary policy,” said Benn Steil, a senior fellow and director of international economics at the Council on Foreign Relations. “He is in a difficult position right now: He is not an economist, he never mastered the lingo, and he has been appointed by a man who wants him to take a position he has been opposed to for years.”
The central challenge facing the Fed, which was made plain in last week’s disastrous press conference and market panic, is that Warsh’s marching orders to lower interest rates to turbocharge Trump’s sluggish economy clash with two fundamental issues.
First, easy money and ignoring the risks of inflation go against everything that Warsh has preached for years, including during a prior tenure as a Federal Reserve board governor during the George W. Bush administration. Second, U.S. inflation remains stubbornly high, thanks to the Iran war, higher energy prices, and an endless onslaught of Trump administration tariffs.
U.S. inflation, as measured by the Fed’s preferred tool, personal consumption expenditures (PCE), is still running at nearly twice the central bank’s objective of 2 percent annual inflation. That was why many investors expected Warsh and the Fed to either raise interest rates slightly in last week’s monthly meeting or at least make a clear case for how the Fed is thinking about the challenge. Instead, the Federal Reserve held pat, with three of the 12 voting members advocating for higher rates.
The lack of action on inflation scared bond markets above all, sending yields on long-term U.S. government debt to nearly 20-year highs. (Yields rise when investors are selling the bonds.) Even a week later, yields remain much higher than almost any time since before the 2008-2009 financial crisis—a sign of worry over the solidity of the U.S. government’s financial stewardship.
Warsh then compounded the confusion with a press conference in which he welcomed those sky-high bond yields, arguing that the market was doing the bank’s work for it by raising borrowing costs for businesses and consumers. He also argued that the Fed should just sit back and listen to what the market thinks about the economy, rather than seeking to offer guidance on what the helmsmen think. That is not at all how the Fed has traditionally worked.
“Market participants are learning to play the ball, not the referee. And market prices will continue to respond in the direction and magnitude they see fit,” Warsh said. “This is, in my view, a change for the better, and we’re just getting started. After all, the central bank need not always and everywhere be the center of attention. I understand the desire for rolling forecasts and commentary from this committee, but for our part, we need to observe market reaction to developments direct and unfiltered.”
That is an abrupt change to the forward guidance that former Fed chairs, including the recently ousted Jerome Powell, routinely gave the market on how the Federal Reserve views the economy, what steps it is considering, and why.
“His stated objective doesn’t make any sense: ‘I want the markets to give me a signal without me telling them.’ The markets reflect what the Fed will do, not what it should do,” said David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution.
“You can get away with this stuff as a congressman or even the president, but you can’t get away with incoherent rants when you are the Fed chairman,” added Wessel, who has written extensively about the Federal Reserve.
While current inflation trends may not be enough to justify rate hikes this summer, even if they remain elevated, Warsh further muddied the water and confused investors by suggesting that the Fed would look at measuring inflation differently in the future. That overhaul of the Fed analysis is in the hands of outside task forces that Warsh appointed, not career central bank officials, so it is not clear what numbers the Federal Reserve will even be looking at in a few months’ time.
“Who knows, come after next January, what we might say about strategy. I suspect the task forces might have something to add,” Warsh said at the press conference. “We’re going to deliver 2 percent inflation and not a whisper more, but to achieve that, I’m looking at a broader set of inflation data than PCE.”
That could be one way for Warsh to slither out of the anti-inflation skin he has worn for so long, but it is risky if the Fed waits too long to calibrate the economy.
“Right now, my reading is that he understands the correct monetary policy is to raise rates, and he is not doing that. I think he is inventing rosy scenarios. Right now, he is really rolling the dice,” Steil said.
All of this translates into more uncertainty for an economy that is already wrestling with uncertain consequences from an artificial intelligence investment boom, the lingering impacts of the Iran war on energy and commodity prices, and continued disruptions to trade thanks to a new raft of tariffs.
The confusion at the Fed could also have important political ramifications. Trump finally forced Powell out ahead of schedule in a bid to secure a more pliant central bank chair, and he tried to fire other Federal Reserve governors who did not hew to his demands for easy money. The worry is that the longer Warsh avoids placating Trump, the more political pressure he will come under, which could turn into additional efforts from the White House to fire Federal Reserve leads and further undermine the bank’s independence.
“Warsh spent the last 15 years saying that everybody at the Fed was wrong, and he doesn’t come with a lot of goodwill,” even without the worries about intensified political pressure, Wessel said. “He didn’t have a lot of credibility to begin with, and he hasn’t built any.”