The Economy That Kevin Warsh, the Federal Reserve’s New Chair, Is Inheriting
The Federal Reserve’s board of governors
Kevin M. Warsh takes the reins of the Federal Reserve at a critical juncture for the economy, and for the central bank itself.
As Fed chair, a role he will soon assume, Mr. Warsh will need to navigate a delicate economic moment, a president who demands lower interest rates and an increasingly divided leadership committee — one whose members will now include Jerome H. Powell, the departing Fed chair.
An unusual transition
For the first time since 1948, a former Fed chair will remain with the central bank past the end of his term. Mr. Powell’s decision to stay as a board governor reflects his concerns over the Fed’s independence amid demands from the Trump administration for lower interest rates.
The Justice Department investigated Mr. Powell and the Fed over renovations to its headquarters, a move that was largely viewed as a pretense to exert pressure. Last month, the department dropped the inquiry but said it could reopen it at any point.
President Trump is also trying to oust Lisa D. Cook, a Biden-appointed governor. Whether he has standing to do so is now before the Supreme Court.
Mr. Powell’s continued presence means that Mr. Trump might not have an opportunity to nominate another governor to the seven-member board until January 2028, when Mr. Powell’s term as governor expires.
Trump appointees could be a majority of the Fed board by the time he leaves office
Interest rate pressures
A key question for Mr. Warsh as his tenure as chair begins is whether he will do Mr. Trump’s bidding as the president’s nominee — something that Mr. Warsh has repeatedly denied.
Mr. Trump has expressed a desire for rates to fall to 1 percent or even lower to stimulate economic growth. At its April meeting, the Fed kept the federal funds rate, its benchmark interest rate, at a range of 3.5 to 3.75 percent.
The Fed uses its benchmark interest rate to steer the economy with two main goals in mind: to keep inflation levels low and the labor market stable and healthy.
During a period of runaway inflation in the 1980s, the chair at the time, Paul Volcker, pushed the Fed to ramp up interest rates to double digits to slow down price increases. The efforts worked, but at the cost of two recessions.
The benchmark interest rate under recent Fed chairs
Mr. Powell, who also faced inflation challenges as chair, often referenced the Volcker era. During the Covid recovery period, inflation rose to its highest level in decades. After mistakenly arguing at first that higher prices were likely to be “transitory” and that raising interest rates wasn’t necessary, Mr. Powell and his colleagues were forced to change course. They raised interest rates from near-zero in 2022 to as high as 5.5 percent by July 2023.
Since the onset of the Iran war, rising energy prices have pushed prices up yet again, and some Fed officials believe that lowering rates will lead to a resurgence of inflation. At the same time, the labor market has remained relatively solid, further weakening the case for cuts as a way to lower borrowing costs and stimulate growth.
If the Volcker era was a guide for Mr. Powell, Mr. Warsh might be looking for parallels to another point in Fed history — the personal computing revolution of the 1990s.
Alan Greenspan, then the Fed chair, resisted the call to raise rates during a time when many feared the economy was running too hot. He argued that the United States was experiencing a productivity boom, meaning that strong growth was unlikely to be coupled with inflation, a hunch that turned out to be correct.
Mr. Warsh has said he believes the country is on the verge of a similar productivity boom today, ushered in by artificial intelligence. If that turns out to be the case, it could clear a path for the Fed to cut rates without stoking inflation.
A $6.7 trillion balance sheet
Interest rates are the most visible aspects of the Fed’s efforts to steer the economy. But the central bank also plays another pivotal role, as an investor.
It regularly buys government bonds, mortgage-backed securities and other assets. These assets are balanced by the Fed’s so-called liabilities, or debt that it owes to others. The primary components of the Fed’s balance sheet are paper currency in circulation and bank reserves. During times of economic turmoil, the Fed often increases its investments, as seen during the 2008 financial crisis when it bought large amounts of Treasuries and mortgage-backed securities to lower long-term interest rates through quantitative easing.
Former Fed governor Mr. Warsh initially supported this policy but later resigned in protest, citing concerns that the Fed was distorting financial markets. The Fed’s balance sheet has since expanded due to another round of quantitative easing during the pandemic, with Mr. Warsh now prioritizing reducing the over $6 trillion in assets.
Internal disagreements have emerged within the Fed, with Mr. Warsh advocating for more debate and dissent among officials. During Mr. Powell’s tenure as chair, there were notable dissents among the voting members of the rate-setting committee, signaling a new era of internal divisions within the central bank.
Mr. Powell’s decision to remain on the board adds another layer of complexity, as his presence could influence the outcome of future policy decisions. The public disagreements among Fed officials have raised concerns about the central bank’s unity and conviction in its monetary policy. sentence in a different way:
The cat is sleeping peacefully on the windowsill.
The cat is peacefully sleeping on the windowsill. following sentence:
“The cat sat lazily in the sun, grooming its fur.”
The cat lounged in the sunlight, leisurely grooming its fur.
