Powell’s term at the helm ends in May, although it remains unclear if he will also step down from the Fed’s powerful board of governors.
Gold and silver prices dropped Friday with investors soothed by Trump’s choice of Warsh, while Wall Street dipped.
Senate hurdle
Warsh will need to be confirmed by the US Senate, fielding questions from lawmakers amid growing concerns about threats to the Fed’s insulation from politics.
Trump’s recent attempt to oust another Fed Governor, Lisa Cook, and his administration’s investigation into Powell over renovation costs at the bank, have sparked worries about Fed independence.
If independence were eroded, this could have negative ramifications for the world’s biggest economy, experts warn.
Warsh must now get through a Senate Banking Committee hearing, “maintaining the confidence of both markets and the President in the process,” said economist Samuel Tombs of Pantheon Macroeconomics.
After which, he must pass a confirmation vote in the Senate with a simple majority.
But Republican Thom Tillis, who sits on the banking committee, reiterated Friday his plan to oppose the confirmation of any Fed nominee – including the next chairman – until the probe against Powell is resolved.
The top Democrat on the panel, Senator Elizabeth Warren, warned that Warsh’s nomination “is the latest step in Trump’s attempt to seize control of the Fed,” urging Republicans to also block it.
With 13 Republicans and 11 Democrats on the panel, a single Republican’s opposition could trigger an impasse in Warsh’s nomination.
Economic challenges
Warsh, who is from New York, was once known as an inflation “hawk” favouring higher interest rates to curb price hikes.
But he has publicly stepped up criticism of the Fed recently, endorsing many policy positions of the Trump administration.
He used to be a mergers and acquisitions banker at Morgan Stanley, and is currently a visiting fellow at the Hoover Institution, a think tank.
As Trump continues to call for lower interest rates to boost the economy, all eyes will be on whether Warsh defends the bank’s independence in the face of politics.
He will need to convince markets and policymakers that he is upholding the bank’s dual mandate of stable prices and low unemployment independently.
Even without Trump’s pressure, the Fed’s job has become increasingly challenging as US tariffs fuel worries of stubborn inflation, with the employment market cooling.
The situation leaves Fed policymakers walking a tightrope as they adjust rates, deciding if they should keep levels higher to curb inflation or lower them to support the economy.
With the labour market likely deteriorating further and inflation expected to ease, the next Fed chief could uncontroversially reduce rates, Tombs said.
But the jury is out on whether Warsh will “pander to the president” if persistent inflation called for higher rates, he added.
The selection ends a race that narrowed to four contenders – Warsh; Fed governor Christopher Waller; Rick Rieder of BlackRock; and Trump’s top economic adviser Kevin Hassett.
Trump said that he did not pick Hassett, who heads the White House National Economic Council, as Hassett was “indescribably good” in his current role. Waller and Rieder “would have been outstanding” too, he said.
The decision caps a closely watched search for a successor to Fed Chair Jerome Powell, whom the president has repeatedly lambasted for not cutting interest rates more swiftly.
– AFP