Fed Chair Kevin Warsh wants the Federal Reserve to pipe down. The central bank’s leader has said he thinks the Fed should cut back its communications and reduce financial markets’ dependence on its guidance. But President Donald Trump could end that quiet transition.
A little more than three months into the job, Warsh faces an American economy split in two. On one side, the tech giants driving the artificial intelligence boom are going gangbusters. Their market caps reflect an unshakable faith among investors in a huge payoff, even if it’s not clear when it will arrive — or if it will arrive at all. In the other economy, inflation has erased the wage gains of many American families for five months straight. Gas prices are over $4.30 per gallon on average nationwide. Entry-level jobs are drying up for Gen Z, undercutting their careers just as they get underway.
Many past Fed chairs have hiked interest rates in election years. Alan Greenspan’s Fed raised rates in the months leading up to both the 1988 and 2004 presidential elections.
In this conflicting environment, Fed watchers and Wall Street analysts view a rate hike once its two-day meeting concludes Wednesday as all but a done deal. It’d be the first interest rate increase the Fed has carried out since July 2023. Unfortunately for Warsh, one of the few people expecting him to keep rates down is sitting in the Oval Office. Warsh’s predecessor as chair, Jerome Powell, endured a series of attacks from Trump, including a federal investigation into Powell over the renovation of the bank’s Washington headquarters. The so-called honeymoon between Trump and Warsh is over, as University of Chicago finance professor Anil Kashyap put it to The New York Times. A state of open hostility in which Trump reignites his war against the Fed is certainly a possibility.
On Sunday, Trump doubled down on a bizarre threat to cut off trade with “some nations” that the U.S. has a trade deficit with if the Fed doesn’t lower interest rates, which influence the cost of auto loans, credit cards and mortgages. “We should be paying the lowest interest rate in the world,” Trump told reporters as he left Ireland. He said he didn’t know what Warsh was going to decide on interest rates.
At the moment, the White House is holding up its side of the truce. Over the weekend, White House National Economic Council Director Kevin Hassett had said he’d be “wary” of a rate hike if he were in Warsh’s position. On Tuesday, though, Hassett told CNBC, “We’re going to respect the process and understand that [Warsh] is doing what he and the committee think is correct.” Of course, the president has a long track record of overruling his advisers.
For Warsh, the central bank’s credibility is on the line. Many past Fed chairs have hiked interest rates in election years. Alan Greenspan’s Fed raised rates in the months leading up to both the 1988 and 2004 presidential elections.
Yields on 10-year and 30-year bonds, which also influence borrowing charges for consumers and companies, are hitting multiyear highs.
Greenspan’s Fed also wrestled with a decision whether to ease monetary policy in October 1992, a period of lackluster growth. The central bank had already cut rates three times that year alone. The transcript of the October gathering shows Fed governors at times agonizing over whether to slash rates again, one month before voters decided between re-electing George H.W. Bush or choosing a replacement.
“I wish we had the luxury to sit back and do nothing until after the election, as is the conventional procedure of the Federal Open Market Committee,” Greenspan said, referring to the rate-setting panel within the Fed. “I don’t think we have that luxury. However, I don’t think the markets have been viewing anything we have been doing as politically motivated.”
Greenspan’s view lost out in an 8-4 split vote. The Fed sat still, preferring to merely hint at future rate-easing instead. Bush later blamed Greenspan for his defeat and said the Fed should have slashed rates even quicker. “I reappointed him, and he disappointed me,” Bush said in 1998.
The Fed’s reputation, though, remained intact. That’s part of Warsh’s headaches now.
Bond vigilantes have been pummeling Treasuries in recent weeks. Yields on 10-year and 30-year bonds, which also influence borrowing charges for consumers and companies, are hitting multiyear highs. Investors are unnerved about the U.S.’ $40 trillion debt pile and the inflation unleashed from the Iran war. Deciding to hold off on rate increases might amplify the sell-off even further and add to their growing list of worries about the U.S. economy.
Wall Street is counting on Warsh to disappoint Trump, similar to how Greenspan disappointed Bush in the 1990s. If he doesn’t, it’ll be fair to ask whether the central bank is serious about combating inflation at all.
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