What the New Fed Chair Could Mean for Your Business

Just a couple of weeks ago, Kevin Warsh’s path to being confirmed as the new chairman of the Federal Reserve was looking quite rocky, thanks to a fight over the Department of Justice’s criminal investigation of current Fed chair Jerome Powell over his renovation of the Fed’s headquarters. But last Friday, the DOJ announced it was dropping that investigationpaving the way for Warsh to be confirmed in the next couple weeks.

Unfortunately for him, getting confirmed will be the easiest part of his job. To begin with, the Fed is facing some complicated choices in figuring what to do about interest rates. Rates have fallen substantially over the past two years, but homeowners and business owners would like mortgage rates (currently at 6.2 percent) and loan rates to come down further. But corporate profits and real wages are high, and inflation (which is back above 3 percent) has proved stubbornly hard to bring down. Donald Trump appointed Warsh on the assumption that he would cut rates. But it’s not obvious that’s a smart move at the moment.

Adding to the challenge for Warsh is the fact that Trump has spent the last 16 months at war with the Fed. He’s blasted Powell for refusing to cut interest rates (even though the Fed actually cut rates three times last year), and threatened to fire him. He fired Fed governor Lisa Cook for supposedly lying on a mortgage application (that firing was blocked by the courts). And his DOJ initiated the investigation into Powell, which seemed intended to pressure Powell into quitting. So Warsh is going to become chair under a cloud of suspicion that he will be, in the words of Republican senator John Kennedy of Louisiana, “the president’s human sock puppet,” installed only in order to carry out Trump’s wishes and slash interest rates.

Warsh will not be able to be an effective Fed chair until he dispels that cloud of suspicion. Trump seems to be assuming that once Warsh takes office, he’ll be able to do whatever he wants. That’s not the case. While customarily the Fed chair exerts disproportionate influence over the Fed’s decisions, he ultimately only has one vote out of 12 on the Federal Open Market Committee (which decides whether to raise or lower interest rates). There’s nothing keeping the other members from voting against the chair (and, in fact, of late we’ve seen dissenting votes cast more often).

Complicating Warsh’s task even more, Powell will be staying on at the Fed even after he steps down as chair, in large part because of Trump’s assault on the institution. So Warsh has a lot of work to do to earn the confidence and trust of the other committee members, which he needs if he actually wants to get anything done.

That will be impossible to do if he takes over and immediately starts pushing for big interest-rate cuts. That’s not just because the Fed members do not want to be seen as bowing to Trump’s will. It’s also because the stock market is booming (the S&P 500 is up 29 percent over the past 12 months), economic growth remains healthy with GDP growing at 2 percent in the first quarter, while inflation has crept up due to a spike in energy prices caused by the war in Iran. That’s not an environment in which the Fed would typically cut rates. In fact, on Wednesday, when the Fed voted to keep interest rates steadythree Fed members wanted the Fed to say explicitly that its next move would not necessarily be a rate cut (meaning it might be a rate hike if inflation stays high).

So if Warsh—who in his testimony to Congress sounded less concerned about inflation than Powell is—begins his tenure by trying to slash rates, he risks alienating many of the other committee members, making it harder for him to exert influence going forward. The best strategy would be to ease into his job and not push for anything dramatic on the rate-cut front.