Donald Trump hopes he will pursue an aggressive rate-cutting policy that could revive the economy ahead of the midterm elections. However, the president could well be disappointed.
The mandate of Jerome Powell, the president of the American Central Bank, ends on May 15, to the great joy of Donald Trump, who has made the head of the Fed one of his Turk heads, regularly attacking him on his Truth Social network and threatening to fire him (which he does not have the power to do).
The American president criticizes Jerome Powell in particular for being too timid in lowering his key interest rate, which he had drastically increased in 2022 to curb inflation and has since lowered, without however returning to the level of practically zero rates before the pandemic. A cut in the key interest rate is a boost to growth, and Trump dreams of an economic improvement as the midterm elections approach. Elected in particular on the promise of doing better than Joe Biden on this front, Trump is judged harshly by American voters, who according to a recent poll are now more confidence to Democrats than to Republicans on the economy, something not seen since 2010.
The future independence of the Fed in question
The president is therefore impatiently awaiting the taking up of the post of Kevin Warsh, whom he chose to replace Powell and whom he hopes will be more aligned with his recovery policy. A nomination which naturally arouses concern among those who see it as a risk for the independence of the Fed.
A concern which was unsurprisingly expressed during Kevin Warsh’s hearing before the Senate (if the Fed director is chosen by the president, a Senate vote is necessary to validate it). Democratic Senator Elizabeth Warren, in particular, questioned Warsh’s ability to say no to Donald Trump, and asked whether he believed Trump had indeed lost the 2020 election, a question Warsh dodged.
However, for Lawrence J. White, professor of economics at the Sterns School of Business at New York University, “there is nothing exceptional about a president choosing someone who shares his ideas to lead the Central Bank. This has been true for nominations to the Federal Reserve since the beginning of the process, around 1913. What is exceptional is the extent to which Mr. Trump intervened directly in seeking to pressure Jerome Powell.”
Kevin Warsh, a prudent and consensual choice
Several elements also reassure those who worry about too much allegiance from Kevin Warsh to the American president. First, a Justice Department lawsuit against Jerome Powell, widely considered a political trial, was abandoned following the indignation of several American senators, who threatened not to vote for the confirmation of Warsh if the trial was maintained. “If the investigation against Powell continues, this could greatly complicate the nomination of Kevin Warsh, who risks not being appointed before this summer, or even before the end of the year”, estimated Libby Cantrill, head of public policies at PIMCO, during the annual Media Summit organized in early April in London by the American bond fund.
In addition, among the candidates mentioned to take over from Powell, Donald Trump opted, with Kevin Warsh, for the most conservative choice on interest rates. Christopher Waller, Rick Rieder and Kevin Hassett, whose names were mentioned for a time, were all choices more likely to lead an aggressive policy of lowering rates. As Richard Clarida, global economic advisor at PIMCO, recalls, “Warsh is respected and recognized for his accomplishments. After earning a law degree from Harvard, he began his career on Wall Street, then joined the National Economic Council under President George W. Bush, before serving with distinction as governor of the Fed from 2006 to 2011. During the 2008 global financial crisis, Warsh was a valuable intermediary between the Fed and financial market leaders.”
During his tenure as a member of the Fed, he also became known for a policy favoring the fight against inflation rather than economic recovery. If he has recently watered down his wine and expressed views more in line with those of Donald Trump, it is therefore far from being a strongly ideologically marked choice. A rare act of prudence and consensus on the part of the American president, which can be explained by a desire to reassure the markets in a difficult macroeconomic context.
Why the head of the Fed is not all-powerful
Furthermore, the elements that Kevin Warsh communicated about his future policy during the Senate hearings do not really reflect a revolutionary desire to break the house. Unsurprisingly for a member of the Republican Party, he said he wanted to bring the Fed back to its fundamental mandate: price stability and full employment, the institution having, according to him, in recent years ventured into political territory and consideration of the climate issue which in his eyes goes beyond its mandate. He also criticized the shift taken by the Fed in 2020 towards flexible average inflation targeting, which allows inflation to temporarily exceed 2%, and wants a return to a strict target of 2%, with the use of the interest rate as the main tool to fight inflation.
Even if he changes course once he comes to power, his room for maneuver will not be unlimited. On the one hand, “the head of the Fed is influential, but not all-powerful. A reduction in the key rate must be approved by the majority of the twelve members who vote at each meeting, and the director’s vote only counts as one,” explains Libby Cantrill. On the other hand, the Fed’s action is constrained by the markets, where inflationary pressures remain strong, particularly due to the war in Iran. A frenzied drop in rates could cause a panic in the markets that would send yields on US Treasury bonds skyrocketing, a disaster scenario that has already led Trump to back down in the past, for example following the Liberation Day tariffs or during his threats on Greenland. In addition, if economic growth is important to voters, inflation is just as important: it largely contributed to the Democrats’ defeat in 2024, and a policy that sacrifices this to growth could also be costly for the presidential majority in the midterm elections.
Finally, it is also not written that the good relations between Donald Trump and Kevin Warsh will long survive his taking office. As a reminder, it was also Donald Trump who appointed Jerome Powell to his post in 2017, an idyll which quickly ended. If the president realizes that Kevin Warsh’s hands are also tied, he could quickly experience the same frustration… Without being able to do much about it.
