Analysts noted that Kevin Warsh, whom Donald Trump has nominated to lead the Federal Reserve, is just one vote on the rate-setting committee, potentially placing him in a no-win situation that will arouse the White House’s displeasure.
The central bank voted 10-2 on Wednesday to keep interest rates unchanged, and outgoing Fed Chair Jerome Powell indicated that there was broad support for this stance among both voting and non-voting members of the Federal Open Market Committee.
So, even though Warsh has expressed willingness to lower rates if he replaces Powell, the former Fed governor still needs to convince his peers to go along. However, economic data may weaken his arguments.
Despite Warsh being a dovish nominee, analysts at JPMorgan stuck to their view that the Fed won’t adjust rates at all this year, predicting that unemployment will drop and inflation will remain elevated.
If this forecast comes true, it will go against Trump’s constant demands for the Fed to push ahead with aggressive rate cuts and is likely to put Warsh in the president’s sights. At the same time, Warsh’s ability to use the chairmanship to command deference on the FOMC has its limits.
“Past chairs have generally positioned themselves closer to the center of the Committee’s views and thus received majority support,” JPMorgan said in a note on Friday. “If Warsh finds himself in the minority, he will have to decide whether he will tolerate being outvoted.”
While there have been previous cases of chairs being on the losing end of votes, these happened before the recent practice of post-meeting press briefings.
Analysts warned that besides being a highly awkward situation for a Fed chair undermined by peers, the resulting policy uncertainty could also risk increasing market volatility.
Similarly, Capital Economics pointed out that Warsh has no allies at the Fed, although he is seen as a reliable choice who won’t follow the White House’s orders.
Still, some FOMC members will be skeptical of Warsh’s motives for lower rates. Governor Lisa Cook, whom Trump is still trying to remove from the Fed, is likely to be wary of someone closely associated with the president, and Governor Chris Waller may not be as eager to cut rates now that he’s no longer in the running to be chair.
“When Kevin Warsh takes the helm at the Fed later this year, his first major challenge will be winning over that same committee to his view that interest rates should be lower,” Capital Economics said in a note on Friday. “Failing to do so, Warsh risks facing the same level of abuse from President Trump that Powell endured during his tenure.”
According to Dan Siluk, a portfolio manager at Janus Henderson, whatever the Fed does with rates later this year, Warsh could signal one of the most consequential transitions in over a decade.
In a note on Friday, he cited Warsh’s mix of hawkish instincts and willingness to rethink the Fed’s tools. This includes linking rate cuts to a smaller balance sheet, working with the Treasury Department on debt management, and giving markets less forward guidance.
“Markets should prepare for a Fed that is simultaneously more unpredictable and more orthodox, a combination that marks a genuine shift in the post-crisis monetary landscape,” Siluk predicted.