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Trump's Stunning Fed Pick |
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Dear reader, |
Why did the president do it? |
Why did he tap "hawkish" Kevin Warsh upon the shoulder… and nominate him to succeed Jerome Powell as Federal Reserve chairman? |
After all, the president has been hollering for substantially lower interest rates — cries that Mr. Powell has failed and failed to heed. |
Yet now the president nominates a fellow with a hostile past towards monetary ease. Reported Bloomberg, shortly after the news crossed the wires on Friday: |
The big news of the day was that Trump's reality show-like search for the next Fed chair ended in the most curious of possible outcomes: with the selection of Kevin Warsh, a former Fed governor with a long history of hawkish statements. |
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On the face it, it was extraordinarily hard to square the Warsh pick with Trump's longtime preference for easier monetary policy. During his time at the Fed from 2006-2011, Warsh was famously among the most vocal critics of quantitative easing and the most paranoid about inflation. |
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Warsh's Hawkish Instincts |
Adds the Australian Financial Review: |
Warsh's instincts are well established. In November 2010, when the unemployment rate was 9.8 per cent and the personal consumption expenditures deflator – a favoured inflation gauge – just 1.3 per cent, Warsh pushed back strongly against a second round of quantitative easing… |
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A decade and a half later, Warsh was still pushing a broadly similar message. He criticised the Fed's moves during the pandemic, and blamed money-printing and fiscal stimulus for the inflation that ensued… He continues to speak out against the perceived dangers of the Fed's large balance sheet and even criticised the Fed's modest rate reductions in 2024. |
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Gold and Silver Get Hammered |
How did gold and silver take the news of Kevin Warsh's nomination? |
They took it squarely upon the chin — and it knocked them flat upon their backs. |
Their reaction appeared to validate the hawkish theory. |
Silver took a whopping 31% whaling on Friday — its worst single-day hemorrhage since 1980, some 46 years distant. |
Incidentally: Even with Friday's bloodletting, silver nonetheless ended January up 19%... its ninth consecutive monthly increase. |
Gold, meantime, withstood a heavy 10% blow on Friday. Yet like silver, gold posted a hearty overall 17% advance in January. |
Not surprisingly, the United States dollar index increased Friday on the monetary hawk's nomination. |
The stock market took fright following Friday's announcement — the stock market likes reduced interest rates. |
Though unlike gold silver, stocks merely wobbled on Friday, and managed to maintain the vertical. |
Would Trump Really Nominate a Hawk? |
Yet I cannot believe the president would nominate a monetary hawk, so-called. |
Look merely to his handling of "Too Late" Powell. |
I must therefore conclude that Mr. Warsh tickled the president's sensitive ear with lovely wind music that seduced him. |
Mr. Warsh must have advised the president to sweep aside his hawkish reputation. And he must have assured the president that he would take the blade to interest rates. |
Else, I cannot imagine the president pushing him forward. |
Prominent money man Stanley Druckenmiller is a long-standing acquaintance of Mr. Warsh. He informs us that: |
The branding of Kevin as someone who's always hawkish is not correct. I've seen him go both ways. |
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And apparently Mr. Warsh has "gone both ways." Bloomberg: |
Warsh cut against the dovishness of the Bernanke Fed when he was a part of it, but he's made far more dovish noises recently, and wouldn't have been given the job if he hadn't. |
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Looking at the implicit rates derived from futures by the World Interest Rate Probabilities function, Warsh's nomination was followed by increasing confidence that there would be cuts both at his first meeting in June and by the end of the year. |
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A Political Chameleon? |
Still others believe Mr. Warsh slants in the direction in which his politics leans. |
They believe he is a Republican partisan who is against easing when Democrats occupy the governing saddle — and for easing when Republicans occupy the governing saddle. |
Thus the leftward-slanting Atlantic reports that: |
As late as September 2024, he criticized the Fed for cutting interest rates prematurely. Then, after Trump took office early last year — and it became known that Trump was considering him for Fed chair — Warsh began advocating for rate cuts. |
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In a November Wall Street Journal op-ed, he argued that the United States was on the verge of an AI-driven productivity boom that would be a "significant disinflationary force" and that the Fed "should abandon the dogma that inflation is caused when the economy grows too much and workers get paid too much." |
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In this telling, Warsh is a partisan shape-shifter who advocates for high interest rates (which results in slower growth and higher unemployment) under Democrats and lower rates (faster growth, lower unemployment) under Republicans… |
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This shared approach — easy money for me, economic pain for thee — might explain why Trump was comfortable nominating Warsh. |
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Thus the myth of the "independent" Fed would come in for additional heavy weather. |
Damned if He Does, Damned if He Doesn't |
Should he clear the high bar of the United States Senate, Mr. Warsh will come on station in May. |
I am confident he will clear the Senate bar — he has amassed all the proper credentials from such divine institutions as Harvard and Stanford Universities. |
And from 2006-2011, he sat upon the Federal Reserve's Board of Governors. |
Yet once Mr. Warsh takes up duties within the Eccles Building? |
I believe he will find himself wedged within a dreaded "no-win" position. Here is why? |
If he reduces interest rates substantially, critics will label him the plaything of President Trump, a puppet dangling from the president's strings. |
Yet if he does not reduce rates, the president will grow very sour with him. He will give his regretted nominee a thorough lambasting in the media. |
He will name him"Washout Warsh," "Benedict Warsh" and the like. |
Thus Mr. Warsh will be damned if he does… and damned if he does not… as the phrase runs. |
Thus I wish him the best luck in the world. |
With all the headaches he will likely confront in the times ahead… I hazard he will require the very last ounce of it. |
Brian Maher |
for Freedom Financial News |
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