President Donald Trump announced last week that Kevin Warsh is his pick to succeed Jerome Powell as chair of the Federal Reserved, it’s a job of great consequence at an institution that exerts influence on the lives of everyday Americans.
While the Fed doesn’t decide what groceries or cars cost, it does determine how expensive it is to borrow money to pay for them.
Currently, borrowing is costly, and Fox News said that high interest rates mean larger monthly payments on mortgages, car loans and credit cards, even if the sticker price of a home or vehicle hasn’t changed.
It said that alone makes the Fed’s leadership especially consequential. Trump’s nomination of Warsh to succeed Powell is a move that could alter how aggressively the central bank approaches interest rates, Fox News said. Powell’s term as chair ends in May.
Cuts Not Aggressive Enough
Trump has said that Powell has not cut aggressively enough, even as he has repeatedly described the economy as strong. Historically, rate cuts have been reserved for times of economic weakness, not growth.
The Trump-Powell feud over rates has real-world consequences because for many Americans, the effects are most visible in the housing and auto markets, two of the biggest expenses for most families.
Fox News put it this way: You’re not paying more just because a home or car suddenly costs more. You’re paying more because the money to buy it does.
Fox News said that the elevated borrowing costs are acting like a form of second inflation, pushing mortgages, car loans and credit card bills to levels that stretch household budgets thin.
Many economists say that affordability will not meaningfully improve until the Fed begins cutting rates and keeps them low long enough to lessen pressure on long-term borrowing. That has become a political liability for Trump, who campaigned on restoring affordability and easing household financial strain.
He now faces growing voter skepticism over whether those promises are materializing.
The Economy Leads Public Concerns
Fox News said that a recent poll underscores the stakes. When voters were asked what President Trump’s top priorities should be, nearly four in 10 cited either the economy overall (19%) or prices (17%).
Fox News said that affordability concerns also are giving Democrats an early edge in the generic congressional ballot, which asks voters which party they would support in their U.S. House race this November. Mostly hypothetical at this stage, the question offers an early baseline for the coming election, according to Republican pollster Daron Shaw, who said the poll is an early read, not a forecast.
“We ask about it at this point simply to get a sense of how short-term forces might play out in the general election,” Shaw said.
Fox News said that Democrats leaned heavily on affordability themes in state and local elections this fall, and it paid off.
In places like Virginia, New York and New Jersey, where voters have been squeezed by high housing costs and utility bills, Democratic candidates seized on Trump’s early economic moves, including his trade policy, to argue that his policies were worsening the affordability crisis rather than easing it.
Economist and businessman Mohamed El-Erian told Politico that Warsch could be faster to respond to market conditions.
El-Erian was President of Queens’ College, Cambridge, and Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he was CEO and co-chief investment officer.
He said that in selecting Warsh to lead the Fed, Trump has taken a much different tack than many Wall Street CEOs and Fed watchers might have assumed.
Past Stances Suggest Warsh is Cautious
Politico said that as a former Fed governor and Wall Street banker, Warsh was fixated on threats posed by surging prices and artificially cheap financing costs. That suggests that Warsh is cautious about cutting rates too quickly, Politico said. That view runs counter to Trump’s insistence that Powell’s replacement swiftly bring down short-term interest rates — which risks over-stimulating a fast-growing economy that’s still wrestling with elevated inflation, Politico said.
Over the past year, Warsh has said that he agrees with Trump’s view that borrowing costs should fall, but he also has argued against the Fed’s prior interventions in markets to spur growth, and that its “bloated” balance sheet led to financial excess.
“Monetary policy, by definition, has a certain amount of a lag, and you have to have a forward-looking view,” El-Erian told Politico. “The Fed didn’t engage in that forward-looking view. And I think what’s going to happen now is that he’s going to bring fresh air into the institution.”
El-Erian was asked what signal does Warsh’s selection end to Republican senators, market participants, or CEOs when it comes to central bank independence?
“I think it sends a good signal. I think that President Trump has selected someone who has deep expertise. He has broad experience, including the Fed. He’s a good communicator, and he recognizes that reforms to the Fed are needed to make it more effective,” El-Erian replied.
Warsh Faces Three Major Challenges
El-Erian said that Warch faces challenges as soon as he assumes the Chair.
“Kevin inherits three major challenges. One — a divided Fed. There are opinions all over the place in this Fed right now. Two — a Fed that is protecting its political independence. And three — a Fed that has been so data dependent for so long that it has weakened its strategic muscle,” he said.
“What I suspect he will try to do is address all three by trying to get agreement on the strategic view of the economy. Alan Greenspan did this, Ben Bernanke did this, and Janet Yellen did this,” El-Erian said. “And all three of them had the credentials to do so. They were economics PhDs, etc. Kevin comes into a Fed that has really not used that muscle [recently]. They’ve only used the data-dependent muscle.”
El-Erian added: “I think he will try to overcome those three challenges by trying to get consensus on the strategic view. It’s probably going to take time. Incoming Fed chairs have to assert their authorities on the committee. This committee is particularly divided, and it’s a tricky time for the economy.”
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