—Nironjan Roy—

US President Donald Trump has finally selected Kevin Warsh as the next Chairman of the US central bank Federal Reserve System (Fed), after long speculation. If confirmed by the Senate, Warsh will succeed Jerome Powell, whose term will end in mid-May. Kevin Warsh was one of the frontrunners in the selection list of the Fed’s Chair in 2017, but Trump finally nominated Jerome Powell and dropped Warsh on the consideration that he is too young and historically worried about inflation, so he might not keep rates as low as Trump wanted.

Kevin Warsh, a Harvard Law graduate, has been associated with Fed policy and the financial industry for most of his career. As learnt from the media reports, he has been very strategic in maintaining good networking since his university life. In 2002, when an adviser to the Bush administration in the White House requested a professor at Stanford University to recommend a young hire, the professor immediately offered the position to Warsh with a strong recommendation, terming him as the most brilliant student he has ever worked with; that opened his fortune. In 2005, when Ben Bernanke was selected as successor of Alan Greenspan for Fed’s Chair, another opportunity came to Warsh, who had prepared Bernanke for facing the Senate confirmation hearing. After that, Warsh was appointed as Governor to the Fed’s Board in 2006, the position he decorated at 35 years of age.

While serving as governor in the Fed, Warsh played a significant role when the financial meltdown erupted in 2008. When the US financial market was an emergency for America’s largest banks and the Fed official best connected on Wall Street, Warsh took a leading role coordinating the Fed’s policy response. He played a role in the government’s bailout of some financial institutions, including AIG, and encouraged JPMorgan Chase to acquire Bear Stearns, and thus the crisis-ridden market was salvaged.

Although Warsh could not succeed in getting the position of Fed’s Chair in 2017, he did not give up but rather kept his ambition high of holding the Fed’s top position. One of his activities was to strongly criticise Fed’s Chair, Jerome Powell, for what aligned with Trump’s position. Apart from publicly criticising Powell, Warsh has strategically maintained close ties with President Trump, touting the president’s business agenda, which has eventually rewarded him. During the last few years, Warsh emerged as a strong critic of the Fed’s role, and his target on the Fed was not limited to interest rates, as he has touched other areas as well. In 2019, he cautioned that the Fed was sowing the seeds of a bigger inflation problem by continuing to buy large quantities of treasury bonds and mortgage-backed securities. Warsh has reportedly expressed his clear view against the Treasury’s holding of enormous assets. He has commented that a wholesale revamp of the Fed’s $6.6 trillion asset portfolio, which he has termed as too large and should be part of a new deal with the Treasury Department that reduces the central bank’s role in money markets.

With the selection of Warsh as Fed’s new Chair, people are expecting that rivalry between White House and Fed, particularly between President Trump and Fed’s Chair, will end and Warsh may redesign monetary policy including benchmark rate in line with Trump’s preference. To what extent he would be able to do so is viewed with scepticism among the experts and analysts, as history does not support that reality. Previously whoever has taken the position of Fed’s Chair, has performed opposite. As reported in the media, in 1979 Paul Volcker was made Fed’s chair, but after assuming the position, he has reoriented his approach to inflation. Even all the Fed’s other successive chairs, including long-serving Allan Greenspan, have emphasised continuing their predecessors’ monetary policy. Whether Warsh will follow his predecessors or will bring about some changes in monetary policy and benchmark rate must remain to be seen. However, the media has reported that Warsh has a clear understanding of the Fed’s asset holdings, policy framework, role in the economy and relationship with the executives, which may immensely help him reshape the Fed’s monetary policy and strategic approach.

Since President Trump has nominated Warsh as the Fed’s Chair, confirmation of his nomination is presumably a matter of time, because Republicans enjoy a majority in the House. However, the confirmation process may not move as smoothly as expected. Because a conflicting situation has already arisen over the criminal investigation initiated against the Fed’s current Chair, Jerome Powell, by the Department of Justice, which is viewed with serious dissatisfaction by some senate members. As per media report, Republican Senator, Thom Tillis, who sits on the committee responsible for handling Fed nomination, has vowed to oppose any Fed confirmation – including Warsh whom he has described as “a qualified with deep understanding of monetary policy” – until the prove against Powell has been resolved. Although the process of confirmation may seem cumbersome, the selection will finally get confirmed with a majority in the committee, and it is apparent that Kevin Warsh, who was a strong critic of the Fed, is now going to lead the Fed in the coming years.

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The writer is a certified anti-money laundering specialist and banker based in  Toronto, Canada. Email: [email protected]