President Donald Trump on Friday nominated former Federal Reserve governor Kevin Warsh to serve as the next chair of the US central bank, a pick investors broadly view as experienced and credible but potentially less dovish than markets had expected.
Warsh, who served on the Fed’s Board of Governors from 2006 to 2011 during the global financial crisis, is known as a critic of the central bank’s heavy reliance on forward guidance and its expanded balance sheet, as well as a defender of central bank independence.
“Warsh is a safe pick,” said Jeffrey Roach, chief economist at LPL Financial. “He’s forthright, willing to rethink convention, and not necessarily a yes-man for the President.”
Roach pointed to a speech Warsh delivered last year that outlined his view that modern monetary policy has leaned too heavily on what he described as “central bank fast food,” a reference to tools such as forward guidance and strict data dependency.
“Channeling his inner Richard Fisher and Andy Haldane, Kevin Warsh argued for ‘setting aside Central Bank fast food,’” Roach said. “Last year’s speech is helpful for investors as they anticipate how the policy framework may change under a new chair.”
Warsh’s nomination was announced on the same day that US producer prices came in well above expectations for December, though some investors said the inflation data was quickly overshadowed by the Fed leadership news.
“Despite how much higher it was than consensus, all anyone is going to be talking about is Kevin Warsh,” said Chris Zaccarelli, chief investment officer at Northlight Asset Management. “While the markets are probably relieved that a well-known, former Fed official has been nominated as the next Fed chair, they are also likely to pivot to concerns that he won’t be as dovish as they were expecting the new chair to be.”
Zaccarelli added that Warsh’s biggest challenge will be maintaining confidence in the institution. “At the end of the day, so much of financial markets — and even the economy — are built on confidence, and the most important thing Kevin Warsh can do in his new role is maintain (and if possible, improve) the confidence that investors have in the institution of the Federal Reserve Bank,” he said.
Critic of quantitative easing
Warsh has drawn attention for his long-running criticism of quantitative easing and the Fed’s balance sheet expansion, which he has argued distorted markets and blurred the line between monetary and fiscal policy. In recent speeches, he has also questioned the effectiveness of forward guidance in “normal times” and warned that excessive central bank intervention risks undermining independence.
According to Deutsche Bank, Warsh is often labeled a hawk due to his balance-sheet views, though analysts caution against viewing him as structurally dovish or hawkish on rates. “Although Warsh has argued for lower rates recently, we do not view him as structurally dovish,” the bank said in a note, adding that his past opposition to large-scale bond purchases points to a more restrained use of the Fed’s tools.
Market reaction to the nomination was muted. The US dollar edged slightly higher and 10-year Treasury yields rose modestly, reflecting expectations that a Warsh-led Fed would be reluctant to use the balance sheet to cap long-term rates.
“All else equal, there is a sense that a Warsh Fed technically leans more hawkish,” said Charlie Ripley, senior investment strategist at Allianz Investment Management. “Balancing political pressures to reduce policy rates with inflation risks will remain a challenge.”
Warsh will need Senate confirmation to assume the role and would take over at a time when inflation remains above the Fed’s target and political scrutiny of the central bank is intense. Analysts say his success will hinge on convincing markets and colleagues alike that the Fed can adjust its framework without sacrificing credibility or independence.