Kevin Wersh was sworn in for a four-year term as Chairman of the Federal Reserve, a role that will give him immense influence over interest rates and the direction of the US economy at a consequential moment.
The 56-year-old former finance executive and adviser to President George W. Bush was sworn in on May 22. He previously served on the Fed’s Board of Governors from 2006 to 2011 – a period when the central bank had to deal with the 2008 financial crisis. He rejoined the Fed, which aims for stable prices and maximum employment, at a time when inflation is rising as a result of the Iran war and concerns remain about stability in the job market outside select industries.
“Being called back to public service is the honor of a lifetime and with this oath of office, I accept a high and grave responsibility,” Warsh said during a ceremony at the White House. “My aim now is to create an environment in which the best people can do the best work of their lives, and meet every challenge in a spirit of dedication to the common purpose and national interest. In a word, to excellence.”
Wersch replaces Jerome Powell, who has served as Fed chair since 2018 and who said he intended to keep a “low profile” as Fed governor following Wersch’s confirmation. President Donald Trump nominated Powell for his first term as chairman in 2017. By the following year, the President was criticizing him, telling the Washington Post that he was “not the least bit pleased” with his appointment. In his second term, Trump pressured the Fed to lower its benchmark interest rate and worked to exert influence over the central bank, raising concerns about the institution’s independence.
At the ceremony, Trump said he hoped Warsh would go down as one of the “really great” chairs of the Fed and that his nominee would receive “full support” from his administration.
Trump said, “To be honest, that’s what I really mean. It’s not said any other way. I want Kevin to be completely independent. I want him to be independent and just do a good job. Don’t look at me. Don’t look at anybody.” “Thankfully, unlike some of his predecessors, Kevin understands that when the economy is growing rapidly, it’s a good thing.”
Which economy has Warren inherited as Fed Chairman?
In some ways, the economy that Warsh inherited as Fed chair is similar to the one that Powell faced when he was sworn in as chair in 2018.
In the first quarter of that year, the US economy grew at an annual rate of 2% – the same as the Bureau of Economic Analysis’s advance estimate for the first quarter of this year. The unemployment rate was 3.9% in April 2018, and 4.3% in the same month this year. However, the inflation environment is different. Prices rose 2.5% year-on-year in April 2014, compared to a 3.8% increase in April this year.
David Royal, Thrivent’s chief financial and investment officer, said, “The biggest challenge they face is an economy that is solid, employment that is OK but not great, and inflation that is above their 2% target on every measure.”
Warsh rejoins the Fed at a time when consumer optimism about the economy is at a record low. The University of Michigan’s measure of consumer sentiment fell for the third consecutive month in May to 44.8. According to Joan Su, director of consumer surveys, 57% of survey respondents said higher prices were “depleting” their personal finances.
How are Warsh and Powell different?
Like Powell, who also rose from Fed governor to chairman, Warsh is a well-known figure on Wall Street. He is also no stranger to the central bank, which could help him build consensus among the Federal Open Market Committee, which sets benchmark interest rates.
However, Warsh has called for some reforms at the Fed. During his confirmation hearing, he suggested that the Fed needed a new inflation framework and a communication style that focused less on forward guidance.
“When the Fed speaks, the market responds,” said Frank Sorrentino, founder and CEO of ConnectOne Bank. He said this is what Varsh wants to avoid. “Sometimes it can be a precursor to what policy decisions they want to make, allowing the market to anticipate and move in that direction. I think Warsh doesn’t think that’s a smart way to run an independent Fed, because now you run the risk of politicizing decisions.”
At the same time, he said, Wersh appears to be more visionary than Powell when it comes to setting monetary policy, whereby Fed decisions depend on data available to policymakers at the time of their meetings.
Sorrentino said of Warsh, “He has some very different policy theories about the money supply, the Fed balance sheet, interest rates in general, the impact of AI and will continue to have an impact on the economy.” “He wants to get ahead of things.”
What policies does Warsh support?
While Warsh was once seen as someone focused on keeping inflation in check through higher rates, he has more recently advocated lower borrowing costs.
Royal said there could be two reasons for this. First, Warsh sees AI-powered productivity as a potentially deflationary force. Sorrentino explained the reasoning: AI is expected to make work faster and cheaper, potentially increasing the supply of goods and services. As a result of the laws of supply and demand, prices may fall.
Jacob Robbins, an assistant professor of economics at the University of Illinois, advises caution, previously telling USA TODAY, “You have to be sure of how AI is going to affect the economy before you call for lower interest rates at this time.”
Another reason, Royal said, is that Warsh is also advocating shrinking the Fed’s balance sheet. The idea is that if that happened, Sorrentino said, it would reduce liquidity in the economy, which could lead to lower asset values and ultimately less inflation.
Warsh believes “the Fed balance sheet is distorting the economy — there’s too much cash running behind assets,” Sorrentino said. “What’s the evidence of this? Look where gold is, look where the markets are, and where crypto is… they’ve been inflated.”
What can consumers expect
Historically, markets have declined following the confirmation of new Fed chairmen. Royal said investors shouldn’t be surprised if this happens again after Warsh is sworn in.
“He’s not a current Fed member. He’ll be a less talked-about commodity than some of the other Fed chairmen when he takes over, so I’ll just keep an eye on that volatility,” he said.
The FOMC’s next rate decision will be in mid-June and will mark Warsh’s first appointment as chairman. As of May 22, forecasters expect policymakers to hold the federal funds rate steady at a range of 3.5% to 3.75% as they have done so far this year.
Reach Rachel Barber at (email protected) and follow her at x@rachelbarber_.