Dem
47
GOP
53
Chair Jerome Powell, who led the Federal Reserve for a bit more than 8 years, has reached the end of the line. Actually, he technically reached the end of the line on May 15, but chairs generally stay on until their replacements are formally sworn in. Yesterday, Kevin Warsh was, so the economy is his problem now.
We wrote an item earlier this week about how Warsh has little hope of succeeding, since what Donald Trump wants (lower interest rates) runs contrary to the current state of the economy (high inflation). So, we won't cover that ground again.
However, we have a reader who was a college classmate of Warsh's and has had a long career in finance. And so, we thought it might be helpful to share that perspective. So, take it away J.K. in Short Hills, NJ:
I graduated from Stanford with Kevin Warsh. I did not know him while in school. Many in my innermost circle did, however. The most common characteristic used to describe him was "arrogant." A few have even called him a pr**k. Warsh was quite conservative and, on a left-leaning campus, his politics made him an outlier. To be fair, those who knew him also labeled his intellect as top shelf.
As a market strategist on Wall Street, I have followed Warsh's meteoric rise from college classmate to Fed Chair. He has led a charmed—some would say "privileged"—life since leaving Palo Alto. After attaining his J.D. from Harvard, he entered the world of M&A banking at Morgan Stanley, eventually rising to middle management. The positive inflection point in his career began with his marrying into the Estée Lauder empire. Those connections landed him a job in the White House on the George W. Bush economic team, despite not being trained as an economist in the literal sense. The former President then appointed him, a veritable no-name, to be the youngest and wealthiest Fed Governor in history in 2006.
As the neophyte at the Fed, he seemed to speak less publicly than his colleagues. It was during the financial crisis, though, when Warsh "made his bones." When Chair Ben Bernanke needed someone on the Federal Open Market Committee (FOMC) to navigate the market turbulence, it was Warsh, despite empirically not having much market experience, to whom he turned. For that, Warsh, who earned the respect of Wall Street for a job well done, should be commended. After resigning his post as Governor in 2011, Warsh got on his soap box and claimed that quantitative easing had gone too far. He contended that the Fed's making massive purchases of fixed income securities to improve market liquidity during periods of crisis was necessary, but the balance sheet should be normalized when order was restored. We will never know if he was/is correct or how much quantitative easing helped the economy. Certainly, his thesis was at least reasonable.
Warsh parlayed his Fed appointment to various roles—he returned to Stanford to be a fellow at the Hoover Institute, a true bastion of conservatism. He also became a partner at Duquesne Capital, run by legendary fund manager Stan Drukenmiller, to fill his already heavy treasure chest. Warsh was supposedly a finalist for the FOMC Chair in 2018, which eventually was given to Jerome Powell. Donald Trump publicly bemoaned his choice of Powell over Warsh soon after the former took the reins at the central bank.
At the start of Trump's current term, Warsh was the favorite for Treasury Secretary. Knowing what I do about him from those who knew him back in the day, I surmise that he passed on the appointment (or was skipped over by the President) because doing so would have made him Trump's bi**h lackey. It was Fed Chair or bust.
Arguably an "expert," I do believe Warsh is qualified. While his ascension to Fed Governor in 2006 was laughable, his being confirmed as Chair in 2026 was appropriate. Given his experience, he should have been on Trump's shortlist. Rick Rieder, who hired me out of Wharton for my first job on Wall Street and is a fellow resident of Short Hills, was supposedly runner-up to Warsh. While Rieder is one of the most admired people in finance, Warsh was the better fit. Frankly, the partly-line vote for Warsh's confirmation in the full Senate, save John Fetterman, was disappointing and not deserved.
Those who voted "no" contend that Warsh will simply take his orders from the President. Again, knowing what I know about Warsh, and that he either self-selected himself out or was passed over for Treasury, suggests that he will act independently from the White House. Although both Trump and Warsh want/foresee lower interest rates, so do some market economists that I respect immensely and are far smarter than I am.
Moreover, the FOMC is not a dictatorship. While the Chair has tremendous influence, it is a democracy that Warsh should respect given his prior time as Governor. The current composition of the Fed would push back on any immediate demand by Warsh to cut rates. More importantly, Warsh, thanks to his tenure at Duquesne, knows that cutting rates when no one expects him to would foment substantial volatility, which is bad for markets and ultimately the economy. He may still be a pr**k and an opportunist, but he certainly cares about his legacy.
That said, I have no idea whether he will be successful and concede that new Fed Chairs have a track record of making at least one meaningful blunder in the first 18 months of their tenure. There are also things that concern me about Warsh. Differing from him, I believe that the demand created by the AI build-out will initially outweigh the productivity gains from the new technology, which could stoke inflation and merit higher rates. His also believing that the Fed can reduce the Fed's balance sheet as a counterbalance to inflation sourced by cutting rates is risky and unproven. Time will tell. Still, I am hopeful.
Thanks, J.K.! (Z)