Trump repeatedly clashed with Jerome Powell over interest rates. Will his Fed pick, Kevin Warsh, cut rates?

Before his appointment to the Fed board, Warsh served as special assistant for economic policy to the President and as executive secretary of the White House National Economic Council from 2002 to 2006. Before that, he was with investment bank Morgan Stanley for the better part of a decade.

US Federal Reserve’s rate actions

Warsh’s nomination by Trump is seen as a market-friendly move and has raised hopes for an interest rate cut. Monetary policy decisions taken by the Federal Reserve’s Federal Open Market Committee (FOMC) — the American counterpart of the Reserve Bank of India’s Monetary Policy Committee — don’t only influence the American economy but also have global consequences. Typically, an interest rate cut by the Fed – the world’s most powerful central bank – boosts US growth and can help lower domestic unemployment. But it also encourages investment in emerging economies such as India as US fund managers look overseas for better return on their investments.

Earlier this week, the FOMC left the federal funds rate target range unchanged at 3.5-3.75%, with 10 of the 12 members of the committee voting for the same. The other two — Stephen Miran and Christopher Waller — wanted to lower interest rates by 25 basis points (bps). In 2025, the FOMC lowered the interest rate by 75 bps.

Given that the 12 members of the FOMC each have one vote, a new Fed Chair does not necessarily mean that US interest rates will start coming down. However, the leanings and views of a Fed Chair are crucial information for markets, including Indian ones.

According to a Financial Times report, Warsh has recently maintained that artificial intelligence (AI) will increase productivity, meaning that central bank policy need not be so concerned that gains in workers’ take-home wages will stoke inflation. Such an argument could open the way to more Fed rate cuts, the FT reported. Further, in a lecture last year, Warsh said the Fed has assumed a more expansive role inside the American government on all matters of economic policy and “moved into matters of statecraft and soulcraft, too”.

“In my view, forays far afield – for all seasons and all reasons – have led to systematic errors in the conduct of macroeconomic policy,” Warsh said.

Central bank independence

Trump’s interference with the Fed is not just about interest rates but the independence of the central bank, which has increasingly come under pressure during the Republican President’s second term. Warsh’s nomination seemingly aligns with Trump’s views.

In the same speech mentioned above, Warsh had also said that central bank independence “is more often cited than defined. Independence is not a policy goal unto itself. It’s a means of achieving certain important and particular policy outcomes”.

“’Independence’ is reflexively declared when any Fed policy is criticised,” Warsh had said. “I strongly believe in the operational independence of monetary policy as a wise political economy decision. And I believe that Fed independence is chiefly up to the Fed. That does not mean central bankers should be treated as pampered princes. When the monetary outcomes are poor, the Fed should be subjected to serious questioning, strong oversight, and, when they err, opprobrium.”

Interestingly, Warsh did not always have this opinion when it comes to monetary policy. In a 2010 speech titled ‘An Ode to Independence’, Warsh had batted for the Fed’s independence, saying it is “precious”. He had added that the central bank’s “hard-earned credibility” required “fierce independence from the whims of Washington and the wants of Wall Street, and from a pernicious short-termism that can undermine the proper conduct of policy”.

According to Bernd Weidensteiner and Christoph Balz, economists at German bank Commerzbank, Warsh was “clearly hawkish, frequently opposing monetary easing” during his time as a Federal Reserve governor. “…but today he advocates significant interest rate cuts and reform of the Fed. The independence of the central bank remains at risk,” Weidensteiner and Balz said in a note on Friday.