SouthernWorldwide.com – The Federal Reserve has a new leader, but his influence over interest rates may not be as absolute as it appears.
Kevin Warsh, President Trump’s nominee for Fed chair, has been officially sworn in. This follows his confirmation by the Senate last week. Warsh has pledged to serve with “independence and resolve,” echoing the president’s stated desire for Warsh to be “totally independent.”
President Trump has been vocal in his wish for the Fed to lower interest rates, having publicly urged the Federal Reserve to cut rates for months. He has also frequently criticized outgoing Chair Jerome Powell for not acting more swiftly on rate reductions.
Warsh has stated he will not base policy decisions on President Trump’s opinions. He is expected to have an opportunity to voice his views at the Fed’s upcoming interest rate-setting committee meeting next month. His specific intentions regarding rate policy remain unclear. While he indicated some openness to rate cuts last year, his previous tenure as a member of the Fed’s Board of Governors saw him favor tighter monetary policy.
However, Warsh will not have the sole authority to determine interest rates. While Fed chairs typically wield significant influence over the rate-setting committee, their power is not unlimited. Experts suggest that Warsh will need to actively work towards building consensus on the appropriate course of action. This will be a complex task given the current economic uncertainties, concerns about the war in Iran, and persistent inflation issues. The general consensus among analysts is that interest rates will likely remain unchanged for the next few months.
Furthermore, Jerome Powell is currently planning to continue his role on the Fed board. This decision comes after a controversial criminal probe by the Justice Department, which prompted him to extend his service.
“The chair has the power to persuade,” explained Randall Kroszner, who previously served as a Fed governor alongside Warsh from 2006 to 2009 and is now a professor at the University of Chicago. “And they’re in a very strong position to be able to persuade. But they still need to persuade.”
Who actually sets interest rates?
The responsibility for setting interest rate targets lies with the Federal Open Market Committee (FOMC), which convenes eight times annually. Technically, the Fed chair holds only one vote among the committee’s 12 members.
Seven of the FOMC voting members are the Fed governors, who are directly nominated by the president and serve 14-year terms. This structure limits the immediate impact a single administration can have on the Fed’s composition. Currently, three Fed governors are appointees of President Trump, including Warsh. Three others are appointees of President Biden, and the seventh is Powell, who was initially appointed to the Fed board during the Obama administration and later named chair under the first Trump administration.
The remaining five seats on the FOMC are held by the president of the New York Federal Reserve and four rotating members from the chiefs of the other 11 regional Fed banks. The White House has minimal influence over these regional Fed presidents. They are appointed to five-year terms by the board of each regional bank and subsequently approved by the Fed’s Board of Governors.
This means that, at present, only a quarter of the members on the interest rate-setting committee are direct appointees of President Trump. Moreover, there is no guarantee that these Trump appointees will consistently align with the president’s views. After all, Powell himself was appointed chair by Mr. Trump.
The Fed chair’s “soft power”
Despite the formal voting structure, former Fed officials indicate that the chair’s influence within the FOMC extends beyond their single vote.
In certain situations, Fed chairs have cultivated what is known as “soft power,” according to Bill English, a former senior Fed staff member and secretary of the FOMC, who is now a professor at Yale University. If a chair has a history of sound decision-making, they can earn the trust of committee members over time. This credibility can lead to a situation where “at the margin, people are maybe willing to cut the chair some slack,” he noted.
Additionally, both the chair and the general committee members typically aim to reach a consensus during meetings, as stated by Sarah Bloom Raskin, who served as a Fed governor from 2010 to 2014 and later as deputy Treasury secretary during the Obama administration.
“It conveys more force to the marketplace. Markets will pick up on a consensus vote, and might react differently than they would if it were a more fragmented-looking vote,” Raskin told CBS News. “The chair has a great incentive to want to get the consensus of all the voting members.”
The process of building consensus begins several days before the committee convenes, with the chair initiating contact with regional Fed presidents and board members. According to Raskin, a professor at Duke University School of Law, it is often possible to anticipate “where people typically are going to stand” before the meeting officially starts.
Furthermore, the economists and staff supporting the Fed’s Board of Governors report directly to the chair. This means that economic forecasts and other critical information are often shared with the chair before other committee members receive them, as Raskin pointed out. Kroszner added that the chair possesses “a lot of ability to direct the staff to focus on particular issues.”
During the two-day meetings, the chair and other members engage in discussions about the economic landscape and the most appropriate policy path forward, including decisions on whether to adjust the target interest rate, known as the federal funds rate. Kroszner highlighted that the chair typically serves as “the focal point for the discussions” and plays a key role in outlining the policy options under consideration.
English emphasized that throughout this process, “the chair’s job is to talk to everybody, try to convince them that the chair is right.”
“In the end, the chair may not get the outcome that they want, but they get the committee to move as far as they can,” he stated. “Fairly often, probably it’s not exactly what the chair would’ve done if the chair had their druthers, but they have to bring the committee along.”
The outcome of these deliberations is a concise statement detailing the committee’s decisions and outlining, sometimes vaguely, their outlook for the future. Investors closely analyze this statement for subtle changes in wording that might indicate the committee’s future plans. Raskin noted that committee members engage in extensive discussions about this statement, paying close attention to every detail.
“That statement gets argued on quite extensively, including commas and quotation marks and new words,” she remarked. “The smallest little bits are the subject of great debate.”
In some instances, committee members express dissenting opinions. Historically, most dissents have originated from regional Fed presidents. However, in each of the last seven meetings, at least one Trump-appointed board member has supported lower rates than the committee ultimately endorsed.
Nevertheless, votes that are particularly close are uncommon, with near-unanimous decisions being more frequent.
“Often, these things are close calls,” Kroszner commented, explaining that in some situations, members might defer to the chair’s position while still voicing their concerns about the economic direction by “put[ting] down a marker.”
What about Powell?
When Warsh presides over his first FOMC meeting next month, he may face a situation unprecedented in over 75 years: the presence of his predecessor.
Powell’s tenure as Fed chair concluded on Friday, but his term as a regular governor extends until 2028. Most Fed chairs depart the central bank once their term as chair ends. However, a Justice Department criminal investigation has led Powell to prolong his stay.
The investigation, which centered on a costly renovation of the Fed’s offices, was initiated by the office of U.S. Attorney for D.C. Jeanine Pirro. The Fed had received subpoenas earlier this year. Powell perceived this as an attempt by the Trump administration to exert pressure on the Fed and undermine its independence, a claim prosecutors denied. Pirro closed the investigation last month but indicated it could be reopened depending on any criminal referrals made by the Fed’s inspector general.
Powell has stated his intention to remain with the Fed until the probe is “well and truly over.”
“I am encouraged by recent developments, and I am watching the remaining steps in this process carefully,” he stated at a news conference last month. “My decisions on these matters will continue to be guided entirely by what I believe is in the best interest of the institution and the people we serve.”
Barring unforeseen circumstances, Powell will be the first former Fed chair to remain on the board since Marriner Eccles’ chairmanship concluded in 1948.
The extent of Powell’s involvement in interest rate-setting decisions remains a subject of speculation. He indicated last month that he intends to maintain a “low profile.” When a reporter inquired further about this, he offered a brief, smiling response.
“I respect the role of the chair,” he continued, referencing his six years as a governor before becoming chair. “I had real sympathy for how hard it is to get that group to consensus. And I always felt like I don’t want to add to that unnecessarily.”
Powell expressed a desire to be “very constructive,” which he defined as trying to “support … the direction the chair wants to go in, if you can. If you can’t, you can’t.” He explicitly dismissed the notion of acting as a “shadow chair” with undue influence over other members.
Nevertheless, experts suggest that Powell might still attract more attention than a typical committee member.
“I think his presence will be noticed, and how he expresses his views will be noticed,” Raskin told CBS News. She pointed out that the Fed’s current staff are familiar with Powell, and many of them are likely to remain, at least for the time being.
English observed that Powell is a “respected figure” with over a decade of service at the Fed, meaning “when he speaks at an FOMC meeting, people will listen to him.”
“But he’s going to be trying hard to not be obstructionist in any way. I’m sure of that,” he added.
Fed isn’t expected to make any big moves right away
The majority of experts and investors do not anticipate any significant shifts in interest rate policy solely due to Warsh’s assumption of the chair position.
When determining interest rate targets, the FOMC’s mandate is to maintain high employment and stable prices. This is a challenging task as these objectives can be in conflict. If the committee lowers rates too aggressively, it could stimulate the economy but potentially lead to soaring inflation. Conversely, setting rates too high to curb inflation could negatively impact economic growth.
The committee raised rates in 2022 and 2023 to address inflation. Since then, it has adopted a cautious approach to lowering them, implementing rate cuts of one percentage point in late 2024 and an additional 0.75 points in late 2025. Rates have remained steady through all three meetings this year, with employment figures showing relative stability and inflation still exceeding the Fed’s target of 2%. More recently, Powell has cited the U.S. conflict with Iran as a factor contributing to uncertainty and necessitating a careful approach.
New federal data released last week indicated that inflation rose to 3.8% year-over-year in April, marking the highest level since mid-2023. Some analysts believe this development could further reduce the likelihood of a rate cut.
Given the persistent inflation, financial markets currently anticipate that the Fed is more likely to increase interest rates than to decrease them this year. According to CME Group’s FedWatch tool, investors estimate an over 80% probability that the FOMC will maintain stable rates in June and July. By December, the odds of a rate hike are nearly 70%.
In early May, analysts at Bank of America also predicted that the Fed would delay lowering rates until the latter half of 2027, citing an increase in inflation and robust job numbers.
Warsh’s immediate objectives regarding interest rates are not entirely clear.
He has previously advocated for lower rates at various points last year. He has also predicted that artificial intelligence could help curb inflation by driving significant productivity gains, thereby creating room for more accommodative monetary policy. However, at least one FOMC member, Chicago Fed President Austan Goolsbee, has suggested that the hype surrounding AI could potentially lead to increased inflation rather than decreased inflation.
During his earlier term on the Fed board from 2006 to 2011, Warsh was known for a more hawkish stance, indicating a wariness of inflation and a tendency to support tighter monetary policy.
Warsh has also called for a broader shift in the Fed’s operational framework. He has expressed the view that central bank officials communicate their perspectives to the public and make definitive predictions too frequently. His proposals have encompassed changes to various aspects, from the size of the Fed’s balance sheet to its regulatory practices for banks.
In a Senate hearing last month, Warsh stated that President Trump had not asked him to “predetermine, fix or decide on any interest rate decision.” He also informed lawmakers of his intention to consider a variety of viewpoints within the FOMC and expressed a preference for “messier meetings than some.”
English believes it is improbable that Warsh will immediately push for lower interest rates, citing the uncertain economic outlook and the apparent division among committee members at present.
“I don’t think he’s going to be able to get the committee there right away,” he stated.
If Warsh intends to pursue lower rates immediately, Raskin suggests that proponents of such a move would need to present a “credible, analytically strong and disciplined case” that is “pass the laugh test.”
Kroszner, who worked with Warsh on the Fed board and within the George W. Bush administration (Kroszner on the Council of Economic Advisers, Warsh at the National Economic Council), described Warsh as a “long-run strategic thinker” who “wants to bring people along.”
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“He understands that to get things done, you need to … build a consensus around things,” Kroszner explained. “You can’t just come in and say, ‘Off with their heads, I want to do this or I want to do that.’ That’s not going to be very effective.”
