Kevin Warsh Just Inherited A Fed That Doesn't Want To Cut Rates

Kevin Warsh told the Senate during his confirmation hearing he was ready for a "good family fight" over interest rates.

He's about to get one. And it's the rest of the Fed, not the White House, that's lined up on the other side.

The Inflation Problem

Warsh walks into the chair seat with inflation hot and Treasury yields climbing, and several Fed officials have stressed they want to keep the door open for rate hikes, not cuts.

That's a real problem for the new chair, because Trump picked Warsh expecting lower rates, while the FOMC (the Fed committee that sets rates) looks like it wants to hold or go higher.

The setup: Outgoing Governor Stephen Miran was the only member pushing for cuts, voting against the decision at all six meetings he attended. Now Warsh is set to be that voice from the top.

Loretta Mester, who used to run the Cleveland Fed, said Warsh has always based his calls on his read of the economy. "I just don't think right now he can make those arguments in a credible way, because we have an inflation problem," she said.

Officially, Warsh has echoed the Trump line that inflation is temporary and will fade once the fighting in Iran ends and productivity gains kick in. That argument lands differently when the inflation data is already at multi-year highs.

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A Quick Win Is Sitting On The Table

There's one move Warsh could make right out of the gate, and it lines up neatly with what he already wants.

At the late April meeting, three FOMC members voted against the policy statement, with the fight centering on a single sentence markets read as a hint that the next move would be a cut.

That dissent gives Warsh an opening. If he can convince the rest of the committee to scrap the sentence, he gets a quick win on his pet issue: less forward guidance, which is when the Fed signals what it plans to do next.

Lou Crandall, chief economist at Wrightson ICAP, called it a smart PR move. Warsh can frame the change as more honest communication rather than a tightening signal, and he avoids looking like the committee outvoted him at his first meeting.

The Bigger Headache Is Trump

The president nominated Warsh after years of publicly attacking former chair Jerome Powell for keeping rates too high. If Warsh holds, expect the same fight on repeat.

There's a workaround: hold rates with the committee, then publicly say he disagreed and tried to push for a cut. Most Fed watchers say that's a non-starter, since it would gut his credibility with his own committee.

The chair's job, more than anything, is to build consensus. Going public against the committee in his first press conference would burn that capital before he ever uses it.

Worth Noting

Bill English, who used to head monetary affairs at the Fed and now teaches at Yale, knows Warsh well. He doesn't think the new chair will pick a fight on day one, and expects him to try to win the committee over with data over time.

Warsh has also been vocal about killing the Fed's "dot plot" of individual rate projections and even questioning the post-meeting press conference itself, so changes to the format are likely whether or not the rate decision goes his way.

Markets will get their first real read on which Warsh shows up at the next FOMC meeting.

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