By Deborah Cunningham
The ability of the new Chair, Kevin Warsh, to lead the Federal Reserve will depend on the market believing that he is not beholden to President Trump. Being sworn in at a ceremony held at the White House has not done him any favours. It was the first time since President Reagan swore in Alan Greenspan that the ceremony took place there rather than at the central bank’s headquarters on the National Mall. Yes, Trump praised Warsh and said he should be “totally independent”. But context is everything.
The president’s comments may reflect that he has realised that it would be counterproductive to put pressure on Warsh straight away. He will not be able — nor even want — to deliver a rate cut at the June monetary policy meeting given rising inflation, geopolitical uncertainty and opposition from the more hawkish members, so why waste political capital? Furthermore, Trump needs to show confidence in Warsh, as he was not one of the favourites for the post (first Christopher Waller, then Rick Rieder, followed by Michelle Bowman and, subsequently, Kevin Hassett). It therefore seems he has granted him a sort of safe-conduct. But, just like the ones they used to give you at school, it will eventually expire. So, perhaps Warsh won’t want to look at social media.
The probability of a change in the target range for the federal funds rate, currently between 3.50% and 3.75%, at the Federal Open Market Committee (FOMC) meeting on 16 and 17 June is virtually nil. But what will happen for the rest of the year? Although rising inflation has not completely curbed consumer spending, concern is mounting. It is likely to continue rising, albeit at a slower pace once the conflict with Iran cools down. The latest Summary of Economic Projections (SEP), published in March, still pointed to a 25-basis-point cut this year; the June edition will almost certainly forecast no changes. It is possible that the dot plot will include signals from some policymakers in favour of a rate hike.
On the dot plot
Chairman Warsh has been openly critical of forward guidance. His argument is that it constrains the Fed, hampering its ability to conduct effective monetary policy. He reinforced this idea during his Senate confirmation hearing: “The Fed tells the whole world what its dot plot will be, what its forecasts will be.” He also stated that monetary policy makers are human and therefore “hold on to those forecasts for longer than they should”. We are not sure we agree, particularly as their decisions are anonymous.
The point is that Warsh does not have as much power as the chair of a company, a foundation or other types of boards. Formally amending or eliminating structural reports, such as the SEP, requires a majority vote by the FOMC. He will have to take his time and gauge the mood in the room before pushing for changes. If Warsh takes a hard line, he could downplay the forecasts at his press conferences. But if he fails to convince his colleagues on procedural matters, the most important items on his agenda, such as the reduction of the Fed’s balance sheet, will be difficult to implement.
