Federal Reserve chairman Jerome Powell, and Federal Reserve nominee Kevin Warsh.
Reuters
When the Federal Open Market Committee meets again in mid-June, it will mark the first time in nearly 80 years that a chairman and former chairman have conducted business together, a historic overlap that comes at a critical time for the central bank.
While the situation may look like a clash of policy officials, the meeting with incoming Chairman Kevin Warsh and outgoing Jerome Powell is unlikely to be too controversial — though it still carries high stakes.
“Both Kevin and Jay will be able to work together, and I think the rest of the FOMC will be able to work together, although I admit it may be a challenge,” said Loretta Mester, who served as president of the Cleveland Fed until 2024 and knows well what goes on behind the doors of committee meetings. “They’re all adults, and they all know what the Fed’s policy is, and I really hope that’s what’s going to drive the decision-making, not these other things that people are worried about.”
While Mester and other observers expect the Fed’s reputation to succeed, the potential for drama is clear. The unusual situation suggests the possibility of competing policy positions, albeit subtle, as markets await the Fed’s next move.
After all, Warsh himself called for “regime change” at the Fed, a direct shot at Powell’s leadership. In addition, President Donald Trump, who nominated both men, has been a staunch critic of Powell and has made no secret that he expects Warsh to lower rates.
In the end, Powell’s apparent turn as Fed chairman underlined the possible fault lines, with four surprising objections from the post-meeting statement, especially from members who objected to a hidden phrase in the document that could be interpreted as a sign of a forward-looking policy.
The regional presidents are standing firm
For those with a fertile imagination, the three “no” votes – from state representatives Neel Kashkari of Minneapolis, Lorie Logan of Dallas and Beth Hammack, Mester’s successor in Cleveland – could be seen as a shot across the bow for Warsh in his bid to lower interest rates.
“Kevin Warsh will not, I don’t believe he will be able to go in there and convince his colleagues that this is the time to lower prices,” said Mester. “He will also want to assess the state of the economy before arguing that it is time to start moving interest rates again.”
Indeed, current economic conditions provide little evidence of opposition to policy easing.
New data on Thursday showed core inflation running at 3.2% in March, ahead of the Fed’s 2% target as the war in Iran and its impact on oil prices combined with falling tariffs to keep consumer prices high.
At the same time, weekly jobless claims fell to their lowest level since September 1969, providing further evidence that the labor market is at least as stable as layoffs are at their lowest level since the early years of former President Richard Nixon.
The data, then, presents another opportunity for conflict at the FOMC. The last time a Fed chairman stayed on as governor after leaving office was in 1948, when Marriner Eccles stayed on amid disagreements with the Truman administration.
Economic, political pressure
“One has to expect that any continued pressure on the Federal Reserve to lower rates due to the political cycle will lead to a very large retaliation, not just by Jay Powell, but by other members of the Federal Reserve,” said Joseph Brusuelas, chief economist at RSM.
The climate is ripe for more conflict at the FOMC, he added.
“This is what happens when you see an attack on a large private Federal Reserve bank,” Brusuelas said. “I don’t think there will be a toxic atmosphere at the Fed or a bad relationship between Powell and Warsh. However, I wouldn’t be surprised if Powell ends up being the swing vote on any move to cut interest rates early.”
Announcing Wednesday his intention to stay on at the Fed after his term as chairman ends in May, Powell played down any chance of a run, insisting he would not seek to thwart Warsh’s agenda and vowing not to be a “shadow chair.”
Instead, he focused on his desire to await the conclusion of the inspector general’s investigation into the renovation of the Fed’s headquarters. Powell played down expectations of an internal conflict, even as he acknowledged broader political tensions.
“I plan to keep a low profile as governor. There’s only one seat,” Powell said, adding that he had no desire for “high-profile opposition or anything like that.”
“I think this is, and will be, a normal, normal kind of transition process,” he added.
Warsh could not be reached for comment.
Like Mester, former Fed Vice Chairman Roger Ferguson expects Powell to make good on his word, even if the possibility of a policy rift looms.
Ferguson also shares Powell’s confidence in Warsh to keep the Fed focused on its main goals of inflation and full employment, although “he’s going to walk a fine line, because he obviously doesn’t have the votes for any immediate action, certainly not to lower rates in the near term.”
“I think he’s not interested in being another source of power, a shadow seat, anything of that nature. He expressed confidence in Kevin Warsh and Kevin Warsh’s ability, and I share that confidence,” Ferguson said Thursday on CNBC. “So I think this is not an attempt to do anything other than preserve the independence of the Fed and, frankly, clear his name forever.”
