President Trump's nomination of Kevin Warsh to lead the Federal Reserve may unexpectedly strengthen the impetus for Jerome Powell to remain in his position. Powell publicly rebutted Warsh's criticism of the Fed's models during last week's press conference, revealing an initial conflict between the two.
President Trump's nomination of Kevin Warsh for Federal Reserve Chair was intended to imprint his own mark on the central bank and relegate current Chair Jerome Powell to the past. However, some Fed observers suggest the situation is more complex, arguing that selecting Warsh might instead solidify Powell's resolve to continue obstructing Trump's policies.
Powell's term as Chair concludes in May, yet his tenure on the Federal Reserve Board extends until 2028, allowing him the option to remain as a Governor. While uncommon, such a scenario is not without precedent. Now, with the imminent leadership of Warsh, a fierce critic of Powell's Fed, and Trump's persistent pressure for interest rate cuts, Powell may choose to stay on to safeguard the central bank's independence.
Although the outcome remains uncertain, Derek Tang, a senior Fed watcher at LH Meyer/Monetary Policy Analytics, stated, "I think Powell would feel an obligation to stay, even if reluctantly, simply because this is such a rare situation."
Tang added that if Powell truly values Fed independence as highly as he claims, then remaining on the Board would be the most effective way to defend that principle.
In an interview, Tang noted that had Trump nominated Fed Governor Christopher Waller—one of the leading candidates for the chairmanship—Powell would likely have chosen to depart. Waller has been part of the Federal Reserve system since 2009 and has authored several papers emphasizing the importance of insulating the Fed from political pressures.
Powell's decision to stay would tangibly impact the White House's influence over the Fed. It would prevent Trump from securing a majority on the seven-member Board and make sweeping institutional reforms at the Fed highly unlikely.
By keeping his options open, Powell has already constrained Trump in a significant way. With no other immediate vacancies on the Fed Board, Trump must utilize the expiring seat of his close ally, Stephen Miran, to appoint Warsh.
Some analysts, however, believe Powell will ultimately choose to leave. Ian Katz, Managing Director at research firm Capital Alpha, said, "I lean more toward Powell leaving."
Powell is making his decision amid extraordinary pressure from the White House directed at the Fed and himself. Mark Spindel, Chief Investment Officer at Potomac River Capital and author of a book on Fed independence, suggested that the unprecedented public pressure from Trump and his allies might actually push Powell toward staying.
"I think Powell feels the institution is under threat because he is under attack," Spindel said.
The Trump administration has launched a criminal investigation into Powell's congressional testimony regarding cost overruns in the renovation of the Fed's headquarters. Powell and critics of Trump view the public disclosure of this probe as blatant political manipulation, posing a severe threat to the Fed's independence.
Furthermore, the White House has argued before the Supreme Court that the president has the authority to fire Fed Governor Lisa Cook for any reason he deems fit. A victory for Trump in this case would allow him to install allies at the Fed to drive his desired reforms.
Spindel indicated that remaining on the Board is Powell's primary means of countering these moves, describing an ongoing, subtle power struggle where the tension is palpable. "Powell hasn't decided because he doesn't have to decide yet," Spindel noted.
Warsh served as a Fed Governor from 2006 to 2011, resigning in opposition to then-Chair Ben Bernanke's continued asset purchases to suppress interest rates after the worst of the financial crisis—a policy known as quantitative easing (QE). Warsh argued that such purchases distorted markets and risked inflation.
For the past 14 years, Warsh has been a staunch critic of the Fed, often employing sharp rhetoric.
Warsh advocates for shrinking the Fed's $6.6 trillion balance sheet to reduce its footprint in financial markets.
In contrast, Powell, who joined the Fed shortly after Warsh's departure in 2012, has supported maintaining a larger balance sheet, viewing it as a crucial tool for mitigating financial crises.
Former Fed Governor Donald Kohn wrote in an email, "Warsh's critical stance toward the Fed is very clear, and he seems committed to pushing for significant institutional reforms."
Kohn stated it is difficult to predict Powell's decision in May, adding, "Ultimately, Warsh would need to convince Powell that any reforms he envisions would preserve the Fed's independence and enhance the efficiency of its staff and regional banks."
Ian Katz commented, "The decision to nominate Warsh could influence Powell's choice, but I can't tell in which direction. Both outcomes are possible."
He added, "Predicting this is more about psychology than economics or markets; it's essentially guessing what's in one person's mind."
Spindel noted that while the issues surrounding the Fed's balance sheet are complex, they hold significant importance for ordinary investors.
The Fed expanded its balance sheet to control mortgage rates,压低长期利率, ensure market lending functions, and support the state and local government bond market, thereby creating space for a soft economic landing and absorbing risks.
In summary, Spindel said, these Fed actions were designed to protect Main Street from Wall Street's crises and have indeed provided substantial benefits to ordinary Americans.
He also suggested that Powell's dissatisfaction with Warsh was subtly apparent during his recent press conference.
When asked if the Fed's models were flawed—a point of criticism from Warsh—Powell pushed back, saying, "I mean, if the issue is that we need to have better models, show me the better models. Where are they?"
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