The new Fed chair arrives as Trump pushes for cuts and inflation pushes back. Two experts on why Warsh faces an almost impossible task
Kevin Warsh takes over as Federal Reserve chair with the White House pushing for lower interest rates and inflation heading in the opposite direction.
May’s consumer price index (CPI) came in at 4.2%, the hottest reading in over a year, driven largely by energy prices following the Iran conflict.
The first Federal Open Market Committee (FOMC) meeting under Warsh's leadership is Tuesday and Wednesday. Bond markets, mortgage brokers, and a White House that expects him to deliver will all be watching.
Nicolas Jabko (pictured top), a political science professor at Johns Hopkins University, said the challenge Warsh faces is not just political. The committee itself may not be on his side.
"He needs to basically sway the entire committee his way if he wants to lower interest rates," Jabko told Mortgage Professional America. "And he may have a lot of trouble doing that because of the new inflationary pressures. The rising prices and inflation have just spiked once again."
Warsh is ‘pigeonholed’
Jabko said Warsh's reputation at the Fed was built during the 2010s, when he was among a minority of board governors who pushed back against the full scope of quantitative easing and ultimately resigned over it. That is where the hawk label comes from.
Warsh has been pushing for an overhaul of how the central bank thinks about and views data, which could help support future rate easing. In his confirmation hearing, he argued that the arrival of artificial intelligence will generate a supply shock significant enough to justify lower rates. Jabko said most economists are not yet convinced.
"He's been taking the position that with the arrival of AI, you don't really need to have a tight monetary strategy, because this arrival of AI will actually create a supply shock," Jabko said. "It will basically increase the productivity of the American economy, and therefore, the Fed should lower interest rates. This is debated amongst economists. I think most economists are very skeptical of Warsh's new argument."
Jabko said a rate cut at this meeting could send the wrong signal to bond markets. If markets read it as the Fed bowing to political pressure, long-term yields could rise, and mortgage rates could go with them.
"If he does that, markets will be very attentive to that, including mortgage brokers," Jabko said. "That will be a sign that the independence of the Federal Reserve is really in question."
Melissa Cohn, regional vice president at William Raveis Mortgage, said Warsh has walked into a corner.
"I think he's totally pigeonholed," Cohn told Mortgage Professional America. "You can't pretend there's no inflation. You can't make that argument."
On holding rates, Cohn believes that Warsh is stuck until inflation starts to subside.
"There is really nothing else that they can do," Cohn said.
The FOMC fight ahead
At the last FOMC meeting, the lone dissenter pushing for lower rates was Stephen Miran, Trump's economic adviser. However, he is no longer on the board as Miran's seat is the one Warsh has taken.
The other three dissenters at that meeting were pushing the other direction, toward removing the forward guidance that signals a rate cut is coming. Jabko said without Miran, finding a coalition willing to ease rates may be challenging.
"When he's out, the people who want lower rates are not going to be all that numerous," Jabko said of Miran's departure. "It's not clear to me that anyone else, judging from the last FOMC meeting, wants lower rates."
Jabko said there is a tradition of deference to the chair, particularly a newly appointed one, that gives Warsh some room to move. But he said that deference has a ceiling.
"There is some deference,” Jabko said. “The chair is the voice of the Federal Reserve, the spokesperson for the Federal Reserve. And so people are willing to defer to him to some extent. But if the chair is completely out of line with basically everyone else on the Federal Open Market Committee, then the chair is not able to get his way."
Jabko pointed to G. William Miller, who chaired the Fed immediately before Paul Volcker, as a cautionary example of what happens to a chair who arrives out of step with the rest of the committee.
Warsh served on the Fed board from 2006 to 2011, so he has experience navigating challenging times on the central bank. Jabko believes that will likely dissuade Warsh from going against the grain, because the alternative could lead to internal conflict.
"It would be a bare-knuckle kind of fight at the Federal Reserve," Jabko said. "And I don't know if he's willing to go in that direction because that would really jeopardize his standing as chair."
Like the rest of the mortgage industry, Jabko said he plans to watch the first press conference closely for an indication of where Warsh is looking to take the Fed in the future.
"I'll be watching the next press conference very attentively," he said. "It's going to be an interesting six months."
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