JPMorgan Chase's research report released on January 30th provided an in-depth analysis of the nomination of Kevin Warsh for the next Federal Reserve Chair. The report notes that this official, who served as a Fed Governor from 2006 to 2011, often displayed hawkish tendencies in the years following the financial crisis; however, his recent remarks have shown a clear shift towards a dovish stance, aligning precisely with the current administration's monetary policy preferences. This shift in position raises a crucial question: what is Warsh's true policy inclination, and for how long can this inclination remain unchanged? JPMorgan's analysts believe that Warsh is likely to vigorously advocate for interest rate cuts this year, but over time, particularly after the midterm elections when the government enters a lame-duck phase, there is a risk his stance could revert to hawkishness, potentially leading to significant adjustments in his policy orientation.
When discussing the Federal Reserve Chair's influence over the Federal Open Market Committee (FOMC), the report reveals an often-overlooked reality: despite the Chair's immense prestige, the obedience of other FOMC members is not unlimited. Historical experience indicates that if a Fed Chair attempts to position themselves at an extreme end of the committee's spectrum of views, they might instead face the尴尬 situation of being overruled by a coalition of other members—the last time a Chair lost a vote dates back to 1986. To avoid such an outcome, successive Chairs have engaged in bilateral communications with each committee member before formal meetings to gauge consensus in advance. This "consult before deciding" mechanism implies that even if Warsh strongly advocates for rate cuts upon taking office, he must present more compelling arguments than those offered last Wednesday, as there is an essential difference between merely criticizing the shortcomings of existing models and actually providing a superior forecasting framework.
Regarding Warsh's long-held policy stance favoring a reduction in the size of the Federal Reserve's balance sheet, the report expresses clear skepticism. While Warsh believes a smaller balance sheet would push interest rates lower, and this view indeed has some supporters within the committee, JPMorgan leans towards the traditional view that quantitative tightening could instead exert mild upward pressure on long-term rates. This technical judgment directly contradicts the current administration's apparent policy goal of lowering mortgage rates, creating a potential source of tension for Warsh's future policy implementation.
In the realm of financial regulation, Warsh is likely to maintain a high degree of alignment with the current Vice Chair for Supervision, Michael Barr, although he might be more outspoken in public statements. Barr has been a key figure for Powell on regulatory matters in recent years. Concerning the prospects for the confirmation process, the report points to current political complexities. The President's social media announcement of the nomination did not specify whether Warsh would fill the soon-to-expire board seat of Governor Michelle Bowman. Given that Powell has not yet announced whether he will resign his governor seat upon the expiration of his term as Chair in May, JPMorgan speculates the administration will likely arrange for Warsh to succeed Bowman's seat. However, Senator Tillis of North Carolina has explicitly stated he will oppose confirming any Fed nominees until the criminal investigation into Powell is concluded, and Senate Majority Leader Thune has acknowledged that moving the process forward without Tillis's support is difficult. This political impasse could lead to an unexpected outcome: Powell might remain in place as Acting Chair after May. While awkward, this scenario could provide the administration with sufficient political impetus to resolve the investigation into Powell and ultimately confirm Warsh's nomination a few weeks later.
Regarding the monetary policy outlook, JPMorgan maintains its existing judgment that the Fed will keep interest rates unchanged for the remainder of the year. The report emphasizes that the latest data released that morning further confirms that core PCE inflation is moving further away from the policy target level, fundamentally weakening the rationale for implementing rate cuts in the near term. Regardless of Warsh's personal policy preferences, persistently high inflation data will be the most practical factor constraining his policy space.
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