On May 13, the U.S. Senate confirmed Warsh's nomination as Fed Chair with a vote of 54 in favor and 45 against. All 53 Republican senators supported the nomination, while only Democratic Senator John Fetterman voted in favor. Senator Kirsten Gillibrand did not cast a vote.
Warsh will succeed Jerome Powell, whose term ends on May 15. Warsh will preside over his first Federal Open Market Committee (FOMC) meeting on June 16-17, filling the position previously held by former board member Stephen Myron.
Early Rate Cut Expectations Stifled by Inflation
Market attention is focused on how quickly Warsh might pivot toward rate cuts. President Trump has publicly criticized Powell for delaying rate reductions, which he claims have burdened government economic policies. Warsh's nomination is seen as a continuation of this trend.
However, inflation data is constraining Warsh's options. The Consumer Price Index (CPI) for April rose 3.8% year-over-year, an increase from March. The Producer Price Index (PPI) also climbed 6.0% year-over-year, marking the highest increase since December 2022. Rising energy prices due to the conflict between the U.S. and Iran are further exacerbating inflationary pressures.
Despite high inflation, Warsh has argued that there is still room for rate cuts. He suggests that productivity gains from artificial intelligence (AI) could alleviate inflationary pressures, and that reducing the Fed's long-term bond holdings could create space for short-term rate reductions. He also believes that alternative indicators, which more accurately reflect actual price movements, should be considered in policy decisions.
However, this reasoning requires validation before leading to a policy shift. It remains uncertain whether the productivity effects of AI will stabilize prices in the short term. Critics argue that rising asset prices could stimulate consumption and push short-term prices higher. Additionally, linking the reduction of long-term bond holdings to short-term rate cuts must undergo internal Fed research.
Political pressures also remain a variable. While Warsh emphasized the Fed's independence during his confirmation hearing, the voting patterns revealed a clear partisan divide. Warsh's decision to retain his board seat after Powell's departure signals that the tension between the Trump administration and the Fed is not yet resolved.
Fed Reforms Likely to Take Precedence Over Rate Cuts
In this context, Warsh's initial actions are expected to focus more on reforming the Fed's operational methods than on adjusting interest rates. He has previously criticized the Fed's large-scale bond purchases and market interventions. The Fed's current asset holdings stand at approximately $6.7 trillion. After taking office, Warsh is anticipated to review the balance sheet reduction, bank reserve requirements, inflation measurement methods, and communication strategies regarding monetary policy.
The first area he may address is the Fed's communication style. Warsh has expressed skepticism about the dot plot, which indicates FOMC members' interest rate projections, and the quarterly Summary of Economic Projections (SEP). He believes that press conferences and forward guidance can overly constrain the market.
However, since the dot plot and press conferences have become essential tools for managing market expectations, experts predict that discussions will likely focus on modifications rather than outright elimination.
The pace of reforms may also be moderated. Randall Kroszner, a professor at the University of Chicago who worked with Warsh at the Fed from 2006 to 2009, told Reuters, "He does not want to shake up the market. He has many things he wants to accomplish, but it will take time to address them one by one." He added, "It’s not as if he will suddenly decide to reduce the balance sheet to $4 trillion."
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.