What to expect from the new Federal Reserve

We now officially have a new Chairperson of the Federal Reserve (the “Fed”), Kevin Warsh. Mr. Warsh was appointed by President Trump and confirmed by the Senate.  He will serve a four year term as the leader of this very important agency.

Throughout its more than 100 year history, different “Feds” are referenced by the name of their chairperson.  Hence, recently we’ve had the Greenspan, Bernanke, Yellen, and Powell Feds. Now we have the Warsh Fed. What can we expect from the new Warsh Fed?  I’ll present some thoughts and then let you decide.

A recent question about the Fed is whether it can maintain its independence.  The creators of the Fed wanted it to be independent.  Hence, the Fed doesn’t report to the President like most federal departments and agencies, and its budget is not funded by Congress. The Fed creators wanted the agency to be free of political considerations so it could focus entirely on what is best over the long run for the economy.

As a result, the seven members of the Fed Board who enact Fed policy, while nominated by the President, do not have to please the President nor can they be removed by the President.  Incidentally, the Chair of the Board has one vote on policy issues like the other members of the Board. The Board members also have staggered fourteen year terms, meaning that at any point in time the Board members will have been appointed by different Presidents.  Four members of the current Fed Board, including Chair Warsh, were appointed by President Trump during his two terms.  My conclusion is that Fed independence will continue under Chair Warsh.

Even with Fed independence in enacting policy continuing under Chair Warsh, there’s the follow-up question of what that policy will be.  The Fed has two goals, keep the inflation rate low and keep the unemployment rate low. In pursuing these objectives, the Fed uses two tools, its influence over interest rates and its control of the money supply.

Unfortunately, it is difficult for the Fed to pursue both objectives simultaneously.  This is because the policies are the opposite for the two objectives.  To moderate the inflation rate, the Fed wants to slow economic growth. To do this, the Fed will increase the internal interest rate it controls, expecting other interest rates to follow. The Fed will also slow the increase in the money supply, perhaps even reducing it.

But to reduce the jobless rate, the Fed will want to stimulate the economy by trying to push interest rates lower and to increase the growth of the money supply.

Which policy will the Warsh Fed initially push?   Based on Chairman Warsh’s public comments, it appears he is most concerned about inflation.  This will mean he will not be advocating the Fed use its powers to lower interest rates and stimulate more money growth. Chair Walsh has also expressed concern about the size of investments the Fed owns.  Reducing the Fed’s investment portfolio would also be consistent with focusing on achieving a lower inflation rate.

Of course, Chairman Warsh’s viewpoints could change if the Iran War ends, resulting in oil and gas prices falling, and tariffs are reduced or removed. Both of these results would cause the inflation rate to decline, meaning inflation would be less of an issue for the Warsh Fed.

Does this analysis mean the Warsh Fed is not concerned about economic growth and job generation?  It does not.  In the past Warsh has said he thinks productivity gains are the way to achieve a faster growing economy and more jobs with better pay. Indeed, in recent years productivity has been improving and economic and job growth have continued.

But Chair Warsh has received some criticism for saying artificial intelligence (AI) will be the engine of economic and job growth in the future. Critics say the statement implies an implicit assumption that AI will create more jobs than it destroys. For many economists, it is not yet clear what the total job impact from AI will be.

My conclusion is the Warsh Fed will not immediately bring big changes. Indeed, the previous Fed under Chairman Powell had not been lowering interest rates, with their last rate cut occurring at the end of 2024.  This implied the Powell Fed was focused on inflation, which the Warsh Fed will likely continue.  One question is whether the Warsh Fed will simply keep interest rates stable, or will it ultimately raise interest rates? 

The Federal Reserve is a very, very important agency in the federal government, with powers that can immediately impact our economic lives.  At this point, I expect two results from the new Warsh Fed.  First, I expect the Fed will continue to preserve its independence, which the creators of the Fed deemed extremely important.  Second, I forecast the Warsh Fed will initially focus on reducing the inflation rate, just as the preceding Powell Fed was doing.  Do you agree with my predictions?  You decide.   

Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.