Warsh’s challenge: Navigating Fed independence and Trump’s demands

Kevin Warsh has sought the job of Federal Reserve chair, off and on, since U.S. President Donald Trump first considered him for the position nearly a decade ago. Now that he is in line for the position, the enormity of the challenge ahead of him is clear.

To be effective, Warsh must gain the trust of at least three constituencies: the committee of Federal Reserve officials whose votes he will have to win to change interest rates; the financial markets, which can undermine his efforts to reduce borrowing costs if they think he is acting politically; and not least Trump, a former real estate developer with an exquisite sense of just how much difference a cut or increase in interest rates can make for those with large debts, whether they are businesses, households or a government.

“He has to thread that needle,” said Raghuram Rajan, an economist at the University of Chicago and former head of India’s central bank. “If you are seen as too pliable to the administration, you lose the support of the members of the (Fed), you become ineffective in creating consensus.”

Yet if he alienates the White House, Rajan said, Warsh runs the risk of putting the Fed back in the White House’s sights. Under Trump, the current chair Jerome Powell has come under relentless fire for not cutting interest rates as quickly as the president would like, and is now under criminal investigation by the U.S. Department of Justice. Powell has called the investigation a pretext to force him to lower rates.

Warsh may also face a bumpy confirmation process in the Senate, where two Republicans have already said they will oppose his nomination unless the criminal investigation is resolved. One of them, Thom Tillis from North Carolina, is on the banking committee, and could prevent that panel from approving the nomination if he and all Democrats vote against it. Tillis repeated Friday that he would oppose Warsh until the U.S. Justice Department investigation is resolved.

And Democratic Sen. Mark Warner from Virginia, who is also on the committee, said that “It is difficult to trust that any chair ... selected by this president will be able to act with the independence required of the position” with the threat of prosecution hanging over Powell.