Trump nominates Kevin Warsh to oversee the Federal Reserve: "Hawkish veteran" shifts to "rate-cutting vanguard" Will the Federal Reserve usher in the "Trump rhythm"?

President Donald Trump posted on his Truth Social platform that he intends to nominate Kevin Warsh as the next chairman of the Federal Reserve. "I have known Kevin for a long time and without a doubt, he will be one of the greatest Federal Reserve Chairmen, perhaps the best," Trump wrote. "Most importantly, he fits the ideal image and will not disappoint you." Warsh served as a Federal Reserve Board governor from 2006 to 2011 and previously served as an economic policy advisor to Trump. He will succeed Jerome Powell, whose term as chairman is set to end in May. For the 55-year-old Warsh, this is a comeback as Trump had opted for Powell over Warsh in 2017 for the top position. If confirmed by the Senate, the former Federal Reserve governor will oversee U.S. monetary policy at a critical time. Currently, many economists and investors believe that the Federal Reserve's independence from elected officials is being threatened by the White House. Warsh publicly advocated for lower interest rates in 2025, in line with Trump's stance, which contradicts his longstanding reputation as an "inflation hawk." During his time at the Federal Reserve, Warsh has always been vigilant about inflation and has often supported raising interest rates. However, last year he echoed Trump's views that rates could be significantly lowered. The willingness to cut rates is seen as a litmus test for the next chairman, raising concerns among Federal Reserve watchers that it could weaken the central bank's independence. Warsh's appointment does not guarantee a change in Federal Reserve policy. Interest rates are decided by the twelve-member Federal Open Market Committee, consisting of seven Federal Reserve governors and five regional Fed presidents. The FOMC decided this week to keep the benchmark rate unchanged, after three consecutive rate cuts at the end of 2025. The current rate level is still far above the ideal position claimed by Trump. His Senate confirmation process may also become complicated due to the recent announcement by the Justice Department that it is investigating the Fed. On January 9th, the Fed received a subpoena to testify in Congress about Powell's handling of a renovation project in 2025. Powell released an unusual video statement condemning the investigation. Several Republican lawmakers have come to the Fed's defense, with one pledging to block any Fed nominations until the legal issues are resolved. Frequent Criticism of Powell Trump has had disagreements with Powell almost since the latter took office in 2018. In 2020, Trump expressed regret for choosing Powell over Warsh for the position: "Kevin, I could have used a little help from you. Why weren't you more assertive when you wanted this job?" he said at the time. Warsh had been providing economic policy advice to Trump since his first presidential campaign. After leaving the Federal Reserve, Warsh had been critical of the institution and recently suggested reforms and a plan for rate cuts. "The key is to break the deadlock because their past ways of operating have not been effective," Warsh said in an interview last July. Warsh was appointed as a Federal Reserve governor in 2006 by President George W. Bush. He had previously served in the Bush White House and had a background on Wall Street. Although not well known when he joined the central bank, his experience and connections in the financial markets and banking industry proved crucial during the 2008 financial crisis. His appointment made him the youngest Federal Reserve governor in history and one of the wealthiest. His wife, Jane Lauder, is the daughter of prominent Republican donor Ronald Lauder, who is the grandson of cosmetics giant Estee Lauder and a former classmate of Trump at the Wharton School. Lauder donated $5 million to Trump's super PAC MAGA Inc. in March. Warsh resigned from the Federal Reserve in 2011, shortly before the Fed launched its second round of bond purchases to support the economy hit hard by the crisis. Since then, he has been critical of the Fed's balance sheet expansion and advocated for more aggressive scaling back to give the Fed more room for rate cuts. His openness to rate cuts marks a shift for Warsh, who had been cautious about inflation and had advocated for rate hikes even during the worst of the financial crisis. Economists at Evercore ISI led by Krishna Guha wrote in a report on Thursday that if Warsh is selected, investors' response will be to steepen the yield curve, expanding the spread between long-term and short-term government bonds, as the market expects him to be more hawkish than other candidates, although he will delay taking hawkish actions until 2026. They also expect the dollar to strengthen and risk assets to initially decline. Despite three 25-basis-point rate cuts by the Fed in September, October, and December of last year, Powell stated on Wednesday that given signs of stabilization in the labor market, this week the FOMC generally supported keeping rates unchanged. Futures market bets show that investors expect rates to fall from the current range of 3.5%-3.75% to about 3% by the end of 2026, but this is still much higher than the level Trump desires. Wall Street: Will Warsh be a Hawk or Dove? After Trump nominated Warsh as the Federal Reserve chairman, the market reacted swiftly, with the dollar giving back some of its gains and the U.S. bond yield curve steepening. This dynamic has also raised concerns about the central bank's independence in setting the global benchmark interest rates. However, market observers on Wall Street point out that the new Federal Reserve chairman will need to build a consensus on rate policy among the 12 voting members of the FOMC. Chairman Powell, appointed by Trump in 2017, will step down on May 15th, but his term as a Federal Reserve governor will continue until 2028. Here is a quick overview of opinions from Wall Street investors and strategists: - Gennadiy Goldberg, Head of U.S. Rate Strategy at TD Securities - David Robin, Rate Strategist at TJM Institutional Services LLC - Tony Farren, Director of Rate Sales and Trading at Mischler Financial Group - Ian Lyngen, Head of U.S. Rate Strategy at BMO Capital Markets - Valentin Marinov, Head of G10 FX Research and Strategy at Credit Agricole - Mark Dowding, Chief Investment Officer at BlueBay Asset Management - Elias Haddad, Global Market Strategist at Brown Brothers Harriman - Michael Metcalfe, Senior Managing Director and Head of Macro Strategy at Delphos Capital - Peter Boockvar, Chief Investment Officer at Onepoint BFG - Krishna Guha, Head of Central Bank Strategy at Evercore ISI These opinions show a range of views on Warsh's potential impact on Federal Reserve policy, the U.S. economy, and financial markets. As he goes through the confirmation process and potentially leads the Fed, the decisions he makes will have far-reaching implications for the economy and the financial sector.