Will Trump's Fed Nominee Kevin Warsh Be Chair In Name Only?

Last Friday, President Trump named Kevin Warsh as his nominee to replace Jerome Powell as Chairman of the Federal Reserve. It’s a big job — the fifth most powerful political office in the world, according to one highly prestigious list — and I generally share Paul Krugman’s dim view of Warsh’s suitability for the position. But barring something unexpected, Warsh will almost certainly navigate some speed bumps in the Senate and get confirmed this Spring to a four-year term as Chair.

The question, then, that should be top of mind for the public, financial market participants, and business leaders is just how much influence Warsh will exert as Chair. Trump thinks the Fed has been cutting interest rates too slowly. He chose Warsh to accelerate the pace of cuts and generally provide easy money for the rest of his presidency. Will Warsh deliver? Krugman is skeptical:

The Fed is a republic, not a dictatorship; key decisions are made by a committee in which the chairperson has only one vote. Fed chairs can only drive policy through persuasion — and Warsh lacks the intellectual and moral credibility to be effective on that score. But God help us if we enter a crisis that requires decisive Fed leadership, the kind Fed chair Ben Bernanke showed during the financial crisis, or Jay Powell is now showing against Trump’s attacks.

Absent a crisis, my prediction is that the majority of Warsh’s colleagues will largely ignore him, albeit without expressing their contempt openly. Even a coalition among the Trump appointees to the Board of Governors – Warsh, Bowman and Miran – won’t be enough to overturn the responsible monetary policy stewardship of the other governors.

I respectfully disagree. Warsh will probably have a similar level of influence over the Fed’s interest-rating setting entity (the Federal Open Market Committee, or FOMC) as any other Fed Chair would have in this moment, and will probably be able to muscle through most, if not all, of the rate cuts that Trump wants. While Krugman and others are correct that the Fed Chair largely only has persuasive power over his fellow FOMC members, history suggests the Warsh will be able to use the variety of hard and soft power tools of persuasion at his disposal to push through his (and Trump’s) agenda.

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First, the history: Fed Chairs almost always get their way. It is very rare for even a single member of the FOMC to dissent in rate-setting decision. Ninety-four percent of all FOMC votes are non-dissents. It is even more rare for the Chair to be the one dissenting on rate-setting decisions because they did not get their way. The last time it happened was Chair Mariner Eccles about 90 years ago. Of course, there may be instances where the Chair is unable to persuade the committee of his position and decides to vote with the majority rather than registering their dissent publicly. But historical analyses find that the Chair usually gets what they want.

I raise the history because Krugman and others essentially have to argue that Warsh is such an unprecedentedly non-credible or outside-the-mainstream pick that he will be a prominent exception in the century-plus history of the Fed. Despite my serious concerns about Warsh’s independence and judgment, and belief he will switch from easy money to hard money the second there’s a Democratic president, I don’t think the other FOMC members will view him as that extreme of a pick. As Krugman notes, a number of mainstream economic commentators on both the center-left and center-right have expressed support for Warsh. He’s a former Fed Board member with all the right credentials and decades of Fed commentary under his belt. He’s not Judy Shelton, the Trump Fed nominee that the Senate refused to confirm in part because she wanted to return to the gold standard.

Believers in Warsh’s limited influence can point to one historical example: G. William Miller, who President Carter appointed to lead the Fed in early 1978. Miller was a former corporate executive with no experience on the Fed Board. He was viewed skeptically from the start because he lacked prior Fed experience and because people thought he would prioritize Carter’s political goal of reducing unemployment rather than addressing the significant inflation of the time.

Miller quickly proved ineffective. In April 1978, a majority of the Fed Board wanted to raise the discount rate to signal a hawkish turn. (This is not the same thing as the Fed Funds Rate decision, which is what people think of as the Fed’s interest-rate setting decision.) Miller, attempting to maintain the low-interest-rate environment favored by the White House, aggressively lobbied his colleagues to hold steady. He failed to persuade them, and the Board outvoted him 4–3 to raise the rate. It was seen as a brutal demonstration of Miller’s lack of control over the Fed, and he eventually resigned in August 1979, less than two years into his four-year term. He was followed by a guy named Paul Volcker, who you might have heard had a different approach on interest rates.

Is Warsh the next Miller? There are some superficial similarities — both appointed by a President with a clear point of view on the direction of interest rates that might be at odds with the data — but Warsh is not a newcomer to the Fed like Miller and, again, seems to have an echo chamber of prominent commentators willing to vouch for his credibility. Unless Warsh comes in pushing repeated, jumbo-sized rate cuts in his initial meetings, I suspect he will have a honeymoon period during which the FOMC will give him the benefit of the doubt in pursuing his preferred rate policy.

And as a prior Fed Board member, Warsh will probably be effective at using the limited hard power tools the Chair does have:

• Control of the Fed’s massive staff: The Fed’s staff of hundreds of economists technically work for the Chair. The individual Fed Board members don’t have the same access or their own individual staffs.1 While the Fed Chair cannot manipulate the data, they do have a hand in shaping the data presentation and narrative the other FOMC members receive in their economic forecasts.

• Agenda-setting: The Chair officially calls the meetings and sets the agenda. They decide which topics are discussed and in what order, which can subtly frame the entire debate.

• The “Chair’s Proposal”: By tradition, the Chair is the one who puts the first formal policy proposal on the table. While others can suggest alternatives, the committee rarely votes on anything other than the Chair’s specific recommendation.

There are also significant soft power tools. Warsh will be the one answering questions in the press conference after the FOMC’s rate-setting decisions. We’ve seen time and again how Chair Powell is able to set the narrative about the state of the economy and the Fed’s likely trajectory at those major public events. Warsh will also be the one appearing before Congress several times a year under his statutory duty as Chair. Those congressional appearances are also vital to shaping public and market opinion. And because so much of what the Fed does is about market expectations, the Chair’s unique ability to shape those expectations gives them unique ability to deliver the actual policy change. You can see Warsh repeatedly priming markets for rate cuts in his public appearances and then saying to his fellow members, “the market is now expecting cuts so it would be disruptive not to provide them.”

There is some chance Warsh overreaches in his initial FOMC meeting, falls on his face, and never recovers his credibility. I think that’s unlikely. It’s much more likely that predictions of his ineffectiveness are overblown and he will exert a similar level of influence as prior Fed Chairs, for better or (I would argue) for worse.