ROI-How soon before Trump dubs Kevin Warsh 'clueless'?: Mike Dolan

In many ways President Donald Trump's decision to pick former Federal Reserve governor Kevin Warsh to head the central bank is a relatively orthodox choice. To many, he is not the ardent interest rate slasher the U.S. president seemed to want. But maybe Trump is just happy having a scapegoat at the Fed. It took less than ‌six months between Trump appointing current Fed Chair Jerome Powell in late 2017 - after endorsing him as someone with "considerable talent and experience" - and then publicly regretting the choice as interest rates climbed.

A year later he was calling Powell "clueless." Since Trump's return to the White House last year, the insults have worsened, with threats to fire him and even talk of a potential criminal indictment — all coming even as rates fell, in the president's view, "too late." Will it ⁠be different this time?

Trump announced on Friday that Warsh was his candidate to lead the Fed, ending months of interviews and teasing amid widespread political and investor hand-wringing over whether the once fiercely independent central bank is being politically captured. But the initial market reaction to the decision, which still needs congressional confirmation, was modest. With a blizzard of other domestic and global influences swirling, it was hard to detect any sudden or pointed shift in the dollar, Treasury bonds or stocks that indicated fresh anxiety.

A basic test of that was that futures still pointed to roughly two Fed rate cuts in 2026 — about where they've ​been since last year. The shaky dollar firmed a bit on the news, and the Treasury yield curve steepened slightly. With a track record as a Fed board governor under Ben Bernanke's leadership through 2011, and an outside career in academic economics, Warsh has his own somewhat controversial take on ‍central banking. But he speaks the lingo and operates mostly within the usual professional parameters.

Likely a requirement for securing the job, he clearly favors a resumption of Fed policy easing. How far he wants to go is less clear — and, since he still has only one of 12 votes at each Fed meeting, his ability to get the rest of the policymakers on board will be key. As Trump said at the World Economic Forum in Davos last month: "Everyone that I interviewed is great. Problem is they change once they get the job."

AI-DRIVEN RATE CUTS? Warsh appears to chime with Treasury Secretary Scott Bessent and former White House adviser, now temporary Fed governor, Stephen Miran in thinking that an artificial-intelligence-driven productivity boom will let the economy ⁠grow faster without risking higher ‌inflation.

While that seems like theoretical cover for more rate cuts, there's no consensus ⁠at the Fed that such productivity boom is actually underway, and some argue it would just raise the so-called "neutral" level of interest rates in the economy instead. More pointedly, Warsh is opposed to using the Fed's balance sheet for monetary policy purposes, and, in general, favors keeping it at a lower overall level.

To the extent that investors in long-term Treasuries and stocks view ‍future use of the Fed's balance sheet in a crisis as a potential "Fed put" on their holdings, Warsh's stance could strike some as hawkish, and the steeper yield curve may reflect that. While he is not hugely out of step with the central banking world on that issue, any push to further shrink the Fed's balance sheet of bonds ​from here could unsettle markets, given the Fed only halted its rundown late last year. Even though some argue that sort of "quantitative tightening" might allow for short-term interest rates to fall, it would likely unsettle the long end of the bond market - not least as countervailing ⁠bank deregulation to boost liquidity is already largely priced in. And if lowering mortgage rates is a hot-button political issue for Trump right now, high long-term yields won't help.

SHADOW FED CHAIR Pending his first comments as "shadow Fed Chair," Warsh's specific rate view is less clear, though many Fed watchers currently assume he would favor less easing than the roughly halving of current rates that both Trump and ⁠Miran seem to advocate right now. Although Warsh's family is widely reported to be close to Trump, the two may not agree exactly on the appropriate level of interest rates, even if both want them lower. And even if they did agree, Warsh must now make his case to the rest of the Fed's policy committee.

Fellow Trump-appointed doves Christopher Waller and Michelle Bowman would likely back him on more easing. But if Miran gives up his board seat for Warsh and Powell remains as a governor after stepping down as chair in May, the doves would still be a minority of the ⁠seven board seats. And across the 12 voting members of the Federal Open Market Committee this year, eight are considered either centrists or hawks on policy.

It may be that simply having Warsh preside over any rate cuts will be enough to please the president, although the last three cuts ⁠under Powell didn't seem to change Trump's mind about him. In the end, maybe Trump ‌knows deep down that halving interest rates is unrealistic and he just likes the option of blaming the Fed for any problems in the economy to deflect any heat from the administration.

Warsh will need all his considerable talent and experience. (The opinions expressed here are those of the author, a columnist for Reuters.)

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(by Mike Dolan; Editing by Marguerita Choy)

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)