Kevin Warsh Appointed as Federal Reserve Chairman
Kevin Warsh has taken over the role of Federal Reserve Chairman, while the outgoing chairman, Jerome Powell, remains on the board of directors. This isn’t typical; usually, departing chairmen exit the board to avoid influencing their successor.
This presents a clear risk: Powell might act as a sort of shadow chairman, potentially rallying enough board support to enforce a series of rate hikes on Warsh.
It’s worth noting that just one rate hike wouldn’t address the pressing issue of an oil price surge. Historically, Powell’s predecessors recognized the distinction between demand-driven inflation and oil-related shocks.
For instance, back in 1990, when Iraq invaded Kuwait, Alan Greenspan acknowledged that an oil shock could jumpstart headline inflation while hindering economic growth. His approach was to lower the federal funds rate in response to the sprouting downturn.
Fast forward to 2008: during a significant rise in prices for oil, food, and metals driven by increasing demand and other factors, Ben Bernanke’s Fed also opted to cut federal funds rates rather than stifle the economy further.
The central issue here is that the Fed can’t directly influence the availability of oil or revive closed delivery routes. Raising rates in response to a supply shock could negatively impact an already shaky economy, weakening housing, hurting profit-driven manufacturing, and squeezing credit access for small businesses.
Just a reminder: oil price increases act much like a tax hike, draining household budgets and causing transportation costs to soar. Even if the Fed pushes interest rates higher, it won’t resolve the oil issue—it merely adds another layer of financial strain.
One wonders why they would pursue such a path, especially with the bond market already tightening. If long-term bond yields exceed critical thresholds, the financial landscape tightens, making it unnecessary for central banks to further tighten policies.
The recent inflation data isn’t alarming either. Although core PPI was quite high at 4.4%, core CPI stood at a much more manageable 2.8%. These figures don’t warrant a panic response to energy-driven commodity shocks.
It’s crucial to consider whether rising oil prices will lead to broader wage and price dynamics. The reality is that we have a long way to go before concluding this situation, and the Fed shouldn’t jump to worst-case scenarios.
The Fed’s main focus should always be to sustain stable inflation expectations while ensuring maximum employment. As Greenspan and Bernanke recognized, rising long-term yields increasingly point towards recession risks.
Adding to the complexity is the specter of Powell as a shadow chairman, as three Biden appointees, Philip Jefferson, Michael Barr, and Lisa Cook, are still on the board. Together with Powell, they might be able to command a majority vote within the seven-member board.
If Trump appointee Christopher Waller turns out to be a pivotal voice as suggested, Powell’s influence could wane, shifting the title to Warsh. However, Powell would still hold sway in the Fed’s responses.
Moreover, Fed presidents Beth Hammack, Neal Kashkari, and Rory Logan from Cleveland, Minneapolis, and Dallas are already signaling potential shifts towards more hawkish stances.
This scenario involves Warsh and the broader U.S. economy potentially facing turmoil. If Powell and his allies attempt to implement rate hikes in reaction to the oil crisis, they may weaken the Fed’s credibility rather than bolster independence. The negative repercussions would likely ripple through factories, homes, and small businesses nationwide.
