Who Is the Real Kevin Warsh?

Last summer, he said that the Fed had committed “the greatest mistake in macroeconomic policy in forty-five years” by allowing inflation to surge post-COVID. This statement marked out Warsh as an inflation hawk, but late last year, after his name had surfaced as a possible candidate to succeed Jerome Powell as chair of the central bank, Warsh publicly argued that A.I. could generate big gains in productivity and be “structurally disinflationary.” The clear implication was that the Fed could now safely cut rates, a shift in policy that Donald Trump happened to be demanding.

In picking a replacement for Powell, Trump had said that he would choose “someone who believes in lower interest rates, by a lot.” Warsh subsequently got the nod, and last week he presided over his first meeting of the Federal Open Market Committee (F.O.M.C.), the policymaking body that determines interest-rate policy. But, far from cutting the cost of borrowing as Trump wanted, the committee revealed that nine of nineteen officials believed that at least one rate hike would be appropriate later this year. Eight members projected that the federal funds rate would remain within its current range of 3.5 to 3.75 per cent. Only one member saw a rate cut in the cards. Warsh himself declined to provide a prediction. At a press conference after the meeting, though, he talked tough, noting that the Fed hadn’t met its inflation target in more than five years, and declaring, “This committee will deliver price stability.” In the futures markets, traders priced in the possibility of a rate rise in September.

Last month, the rate of inflation jumped to 4.2 per cent, its highest level in more than three years. Trump’s needless war with Iran is largely to blame, because it has boosted energy prices. In this environment, it’s entirely reasonable for the Fed to reconsider its policy stance, but Warsh’s hawkish pivot went well beyond what many on Wall Street expected. “We thought he was a dove who favored lowering the federal funds rate (FFR) because he believes that AI is boosting productivity and economic growth while keeping a lid on inflation,” Ed Yardeni, the president of the financial-consulting company Yardeni Research, wrote. The question now is whether Warsh’s début was an early show of independence, a calculated bet, or the start of a very short honeymoon. The Fed meeting took place when President Trump was in Europe for the G-7 summit. When reporters asked him about the prospect of the Fed raising rates, he said, “It’s hard to believe. It just keeps a country down, you know.” Then, he added, “But we have a very good guy over there now. So, I’m guided by what he wants.”