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President Donald Trump’s pick to lead the Federal Reserve is just one vote away from the rate-setting committee, which could put Kevin Warsh in a no-win situation that would anger the White House, analysts said.
The central bank voted 10-2 Wednesday to keep rates steady, and outgoing Fed Chair Jerome Powell indicated there was broad support for that stance among voting and nonvoting members of the Federal Open Market Committee.
So even though Warsh has expressed a willingness to lower rates if he replaces Powell, the former Fed governor still needs to convince his peers to go along. But economic data may undercut his arguments.
Despite the dovish Warsh nomination, JPMorgan analysts maintained their view that the Fed will not change rates at all this year, predicting that unemployment will fall and inflation will remain high.
If that prediction comes true, it will fly in the face of Trump’s relentless demands for the Fed to continue aggressive rate cuts and likely put Warsh in the president’s crosshairs. At the same time, Warsh’s ability to use the presidency to command deference to the FOMC can only go so far.
“Past chairs have generally positioned themselves closer to the center of the Committee’s views and thus received majority support,” JPMorgan said in a note on Friday. “If Warsh finds himself in the minority, he will have to decide whether he will allow himself to be outvoted.”
While there have been previous instances of the chairs missing out on final votes, this happened before the recent custom of post-meeting press briefings.
In addition to a more bleak situation for a Fed chair that has been downgraded by peers, the resulting policy uncertainty could also risk increasing market volatility, analysts warned.
Similarly, Capital Economics points out that Warsh lacks allies at the Fed, although he is seen as a strong option not to do the White House’s bidding.
However, some FOMC members will question Warsh’s motivations for lower rates. Governor Lisa Cook, whom Trump is still trying to oust from the Fed, is likely to be wary of someone closely associated with the president, and Governor Chris Waller may not want to cut rates now that he is out of the running to become the chair.
“If Kevin Warsh takes over the Fed later this year, his first major challenge will be to win over the same committee to his view that interest rates should be low,” Capital Economics said in a note on Friday. “Failure to do so, Warsh risks facing the same level of abuse from President Trump that Powell endured during his tenure.”
Whatever the Fed does on rates later this year, Warsh could signal one of the most important transitions in more than a decade, according to Dan Siluk, portfolio manager at Janus Henderson.
In a note on Friday, he cited Warsh’s mix of hawkish instincts and a willingness to rethink the Fed’s tools. That includes linking rate cuts to a smaller balance sheet, working with the Treasury Department on debt management, and giving markets less forward guidance.
“Markets should prepare for a Fed that is simultaneously unpredictable and more orthodox, a blend that marks a real shift in the post-crisis monetary landscape,” Siluk predicted.
This story was originally featured on Fortune.com
