Federal Reserve Chairman Jerome Powell and Fed candidate Kevin Warsh.
Reuters
When the Federal Open Market Committee reconvenes in mid-June, it will be the first time in nearly 80 years that its current and former committee chairs will work together, but the historical overlap comes at a sensitive time for the central bank.
While the scenario could resemble a clash between policy giants, talks between incoming Chairman Kevin Warsh and outgoing Chairman Jerome Powell are likely to be less adversarial, although the stakes remain high for policy.
“I think Kevin and Jay could have a dialogue with both sides, and I think the rest of the FOMC could have a dialogue, but I think it might be difficult,” said Loretta Mester, who served as president of the Cleveland Fed until 2024 and knows what goes on behind the committee’s doors. “They’re all adults and they understand what the Fed’s mission is. I’m very confident that that’s what drives the decision-making, rather than other things that people are worried about.”
Mester and other observers expect the Fed’s reputation in Congress to spread, but the potential for drama is unmistakable. This unusual situation raises the possibility of competing policy positions, however subtly expressed, as markets await the Fed’s next move.
After all, Mr. Warsh himself has called for “systemic change” at the Fed, a direct criticism of Mr. Powell’s leadership. Additionally, President Donald Trump, who nominated both men, has been harshly critical of Powell and has not publicly said he expects Warsh to cut interest rates.
Finally, Mr. Powell’s final transition as Fed chair underscores the underlying fault lines, with a surprising four dissenting voices in the post-meeting statement, most from members who objected to subtle language in the document that could be interpreted as a signal for policy easing.
Regional presidents take a firm stance
To those with a rich imagination, the “no” votes of Neal Kashkari of Minneapolis, Rory Logan of Dallas, and Beth Hammack, Mester’s successor in Cleveland, may seem like a crushing blow to Warsh’s push for lower interest rates.
“I don’t believe Kevin Warsh is going to step in there and try to convince his colleagues that now is the time to cut rates,” Mester said. “They will also want to assess the economic situation before arguing that it is time to start moving interest rates again.”
Indeed, in the current economic climate there is little to argue for policy easing.
Core inflation remained at 3.2% in March, according to the latest data on Thursday, well above the Fed’s 2% target as the Iran war and its impact on oil prices are compounded by the impact of tariffs to keep consumer prices high.
At the same time, weekly new jobless claims fell to their lowest level since September 1969 and layoffs remained at their lowest level since the early days of former President Richard Nixon, providing further evidence that the labor market is at least stable.
Therefore, this data provides another indication of the possibility of a conflict at the FOMC. The last time a Fed chairman remained in office after resigning was in 1948, when Marriner Eccles remained in office amid tensions with the Truman administration.
economic and political pressure
“If there is further pressure on the Fed to cut rates because of the political climate, we should expect to see even more severe pushback from Jay Powell as well as other Fed members,” said Joseph Brusuelas, chief economist at RSM.
He added that the conditions were ripe for further conflict at the FOMC.
“This is what happens when you witness an attack on the Federal Reserve’s central bank independence,” Bruelas said. “I don’t think there’s going to be a bad atmosphere at the Fed or a negative relationship between Mr. Powell and Mr. Warsh. But I wouldn’t be surprised if Mr. Powell ends up being a swing vote because of the move to cut rates prematurely.”
In announcing on Wednesday that he intended to remain at the Fed after his term as chairman expires in May, Mr. Powell downplayed the possibility of a conflict, insisting he had no intention of blocking Mr. Warsh’s policies and vowing not to become a “shadow chairman.”
Instead, he focused on waiting for the conclusion of the inspector general’s investigation into the Fed’s headquarters renovations. While acknowledging widespread political tensions, Powell played down expectations for intra-party conflict.
“As governor, I’m going to keep a low profile. There’s only one chairman,” Powell said, adding that he doesn’t want to “be a visible dissident or anything.”
“This is a very normal, standard transition process, and I think it will continue to be that way,” he added.
Warsh could not be reached for comment.
Like Mr. Mester, former Fed Vice Chairman Roger Ferguson expects Mr. Powell to keep his word despite the possibility of impending policy differences.
Ferguson also shares the confidence that Powell expressed in Warsh’s remarks that the Fed will remain focused on its main goals of low inflation and full employment, but “there will be a fine line to walk because it’s clear that Powell doesn’t have the votes for immediate action and there certainly won’t be any rate cuts in the near term.”
“I don’t think he’s interested in being an alternate power source or a shadow chair or anything like that. He’s expressed confidence in Kevin Warsh and Kevin Warsh’s abilities, and I share that confidence,” Ferguson said Thursday on CNBC. “So I don’t think this is really an effort to do anything other than preserve the Fed’s independence and frankly clear the Fed’s name once and for all.”
