Nominated new Fed chief: Don’t be afraid of Warsh

E It was a clear sign: the stock market prices only trended slightly downwards when it was announced on Friday that US President Donald Trump Jurist Kevin Warsh wants to be chosen as the next head of the Fed. So investors don’t seem to fear that Warsh will cause major damage to American interest rate policy. The stock markets remain calm because the key interest rates are not decided by the Fed chief alone, but by a twelve-member committee. So Warsh would not be an all-powerful interest rate czar if he is confirmed by the US Senate.

Warsh is also no stranger. He has previously served on the Fed Board of Directors from 2006 to 2011. During this time, he supported all the decisions that were necessary during the financial crisis – and did not disrupt them any further. Nevertheless, it is initially surprising that the stock markets remain so calm, because Warsh is a merciless opportunist. To become Fed chief, Warsh advocates what Trump wants to hear: interest rates would have to fall drastically to stimulate the economy. Warsh even went so far as to call for “regime change” at the Fed.

Trump likes to rely on personal loyalties, and Warsh fits the bill there too. He is the son-in-law of billionaire Lauder, with whom Trump has been friends for decades – and who was the first to have the idea that Trump could annex Greenland. Despite these close ties, the stockbrokers trust that Warsh will bow to the power of fact. There is already a role model: that one current Fed chairman Jerome Powell. He also started out as Trump’s preferred candidate, only to soon ignore instructions from the White House.

Warsh should also take this route, because Trump’s demands are absurd. The Fed cannot lower interest rates to one percent when inflation is at 2.7 percent. The real interest rate would then be negative and every loan would effectively be free. Demand would explode – and so would prices. These connections are simple – and just too high for Trump.