President Trump's nomination of Kevin Warsh for Federal Reserve Chair, aiming to promote lower interest rate policies, confronts a historical pattern where presidents' attempts to secure a compliant central bank leader often fall short. The experiences of the last three presidents illustrate three typical scenarios: a chair who complies but triggers runaway inflation; a chair who professes loyalty but fails to persuade fellow committee members; or a chair who embraces policy independence, ultimately raising rates against the president's wishes. Trump recently articulated his expectations for Warsh clearly at a Washington Alpha Club dinner. After asking Warsh to stand, he joked that he would sue the nominee if he failed to lower interest rates. This remark carries particular weight given Trump's public criticism of Jerome Powell, whom he appointed, and the fact that judicial authorities once considered a criminal investigation into Powell.
Warsh's nomination itself exists within a policy tension. Long known for his hawkish stance, having consistently warned about inflation risks from loose monetary policy, he now receives the nomination after expressing interest-rate-cutting inclinations to the president, despite inflation remaining above the Fed's 2% target. This shift in position may lead to skepticism within the Federal Open Market Committee regarding his true policy intentions.
**Nixon and Burns: The Cost of Compliance** Using humor to convey policy expectations to a Fed chair is not new. At Arthur Burns's swearing-in ceremony in 1970, President Nixon quipped that the audience's applause was "a vote for lower interest rates and more money." As Nixon's long-time economic advisor, Burns understood the president's desire, with Nixon stating, "I respect his independence. But I hope that independently he will conclude that my views are the ones that should be followed." Burns ultimately delivered, maintaining loose monetary policy before the 1972 election. However, this led to inflation surging from below 4% to over 12% by 1974. The Fed was forced to hike rates aggressively, causing a severe recession, while Nixon resigned amidst the Watergate scandal. Although inflation subsided temporarily, it resurged after the Fed abandoned its tight stance. Burns's case stands as a classic warning against political interference in monetary policy.
The experiences of two other chairs, G. William Miller and William McChesney Martin, might offer more relevant insights, demonstrating that even without significant inflationary pressures, a Fed chair can still fail to meet presidential expectations.
**Carter and Miller: An Unmanageable Institution** In late 1977, President Carter nominated G. William Miller, former CEO of Textron, hoping for a pragmatic leader who would cooperate with the administration. However, Miller quickly encountered a cultural clash upon joining the central bank. In his initial policy meetings, he frequently voted against rate hikes, often finding himself in the minority, which rapidly eroded his internal authority. Former Fed Governor Nancy Teeters recalled in a 2008 interview, "Bill Miller had a hard time—especially his first four or five months—because he didn't realize he had to get a majority. He thought he could just tell us what to do, and we would do it. We were all kind of like, 'Huh?'" Seventeen months later, Carter moved Miller to Treasury Secretary and appointed Paul Volcker to lead the Fed. Volcker's aggressive rate hikes tamed inflation but the ensuing recession hurt Carter's re-election prospects.
Unlike Miller, Kevin Wash possesses significant institutional experience, having served as a Governor for five years during the financial crisis, granting him deep understanding of the central bank's workings. Yet, he too faces challenges in building consensus. Former New York Fed President William Dudley noted, "He is extremely poised, but initially he may have struggled to win over Fed staff and FOMC members because some of his policy ideas were 'not fully formed.'" For instance, Warsh voted in favor of quantitative easing in 2010, only to publish a column days later questioning that decision. Years later, when he criticized Fed policy as "random and chaotic," Minneapolis Fed President Neel Kashkari publicly retorted, "Kevin is a bit of a puzzle, inconsistent, voting for QE and then criticizing it." Notably, Kashkari is a voting member of the FOMC this year. This history highlights the tests Warsh would face regarding policy consistency and committee cohesion if confirmed.
**Truman and Martin: The Victory of Independence** History reveals a third possibility: even a competent Fed chair can act contrary to the president's desires. This was the experience between President Truman and William McChesney Martin. Before 1951, the Fed was largely subservient to the Treasury Department. When Truman's advisors negotiated an accord to grant the Fed independence, the incumbent chair resigned. Truman appointed Martin, a Treasury official involved in the negotiations. Conventional wisdom in Washington and Wall Street held that this was merely "the Treasury controlling the central bank by other means"—appearing to grant independence while installing a loyalist.
However, Martin made his position clear to Truman before the nomination. According to biographies, during a White House meeting, Truman asked Martin if he promised to keep interest rates stable. Martin did not yield, pointing out that if policies were not prudent, "raising rates might become necessary again. The market will not wait for kings, prime ministers, presidents, treasury secretaries, or Fed chairmen." Truman appointed him anyway but soon regretted it. Under Martin's leadership, the Fed persistently pursued tight policies. Martin later coined the famous metaphor about the Fed's role being to "take away the punch bowl just when the party gets going." In 1952, the two men met on the street; Martin greeted the president, to which Truman replied with a single word: "Traitor!" Martin went on to serve for 19 years under four presidents. His early defense of central bank independence, contrasted with Burns's later capitulation to political pressure, is deeply embedded in the Fed's institutional memory, serving as a crucial reference for chairs balancing policy autonomy against political expectations.
**Warsh's Tightrope** During his tenure as a Fed Governor, Warsh himself emphasized the important tradition of central bank independence. In a 2010 speech on the Fed's role, he stated clearly, "The only reputation a central banker should seek, if any, is a footnote in history books." Now, if appointed Chair, Warsh would face a complex balancing act. Daleep Singh, a former New York Fed official and advisor to the Biden administration, noted, "He is genuinely committed to preserving the Fed as a respected and independent institution." Singh also emphasized that maintaining institutional autonomy could create friction with Trump, potentially placing Warsh in a situation similar to Powell's, stating, "The key is how he manages that relationship in private. Once it becomes a public confrontation, it's very hard to walk back."
Last month at the World Economic Forum, before formally announcing his choice, Trump commented on the phenomenon of Fed chairs undergoing an "independence transformation": "It is amazing how people, once they get that position, they tend to change." This remark not only reflects his awareness of the central bank's independent tradition but also signals potential future policy tensions.
Comments