What will Warsh do?
The next Federal Reserve Open Market Committee meeting is June 16-17. Kevin Warsh should be in place and preside over this meeting. He may find himself in an interesting dilemma. The entire world will be expecting him to push for lower rates and he may surprise those expectations. The economy may not oblige and neither may other members of the committee. At April’s meeting, in its implementation note, the committee said “The Board of Governors of the Federal Reserve System voted unanimously to maintain the interest rate paid on reserve balances at 3.65 percent, effective April 30, 2026.”
However, the headlines in the media did not convey this message. USA Today said “Fed holds rates steady amid dissents” saying “A divided Federal Reserve left its benchmark interest rate unchanged on April 29.” “For the first time since 1992, four of 12 voting members dissented from the decision. Fed Governor Stephen Miran preferred to lower the target range by a quarter-point, as he has at previous meetings. Committee members Beth Hammack, Neel Kashkari, and Lorie Logan supported the rate decision, but opposed the inclusion of language in the statement that might imply they are leaning toward future rate cuts.” FAKE NEWS!!!
One press report actually said that the vote was 8-4 yet the Fed release said that it was unanimous. Miran always votes for lower rates regardless. Miran is a place holder for Warsh. Miran’s term ended in January but has stayed on until Warsh is confirmed. Also Miran resigned from the Council of Economic Advisors to stay on the Fed past the designated term. People talk about Trump wanting to appoint more governors in order to get control of the Fed. However, those folk forget that he has appointed four of the seven members (Miran, Waller, Bowman and Powell). Of course, Miran is the only one that will do Trump’s bidding. But still Miran voted with the majority to hold.
Note that the three members who are said to have dissented were only opposed at the forward guidance regarding future rate cuts. Warsh also opposes forward guidance and will discontinue the practice once in place. So at best the actually vote might have been 11-1 but the final recorded vote was 12-0. Apparently, the media is trying to gin up a controversy at the Fed where there is none. Of course there are disagreements. Of the twelve, at least two members favor full employment over price stability, at least two members are middle of the road and at least four are inflation hawks. Unless Warsh has had an epiphany, I expect him to be on the fight inflation side.
It is noteworthy that as usual, the dissention is mostly at the reserve banks which are less political than the Washington based Board of Governors. That is why Trump has indicated that he wants more control in naming the reserve bank presidents. But currently, that task is solely in the hands of the reserve banks’ board of directors which are made up of three classes of directors. Class A directors are bankers elected by the Fed member banks in that region. Class B directors cannot be an officer or employee of a bank but are nominated by the banks in the region. Class C directors represent the public and are appointed by the Board of Governors and cannot be affiliated with any bank or financial institution. I was a Class C director. The chairman of the reserve bank can only be a Class C director. I served a term as chair of Atlanta’s Nashville branch board. At most, the president could hope for is to influence the decision by the Board of Governors to renew the term of a reserve bank president. Possible but very doubtful.
Class A directors – the bank representatives – are prohibited from participating in the selection of a new reserve bank president and first vice presidents. They are also prohibited in participating in performance reviews and compensation decisions. So if President Trump – or any president – wanted to have a say in the appointment of a new reserve bank president, there would have to be a change in the law, which is highly unlikely. Also there is some confusion out there regarding Fed member banks that must hold shares in the Fed regional reserve bank. Those are nonvoting shares that are paid a very small dividend totally unrelated to the earnings on the Fed’s balance sheet. The only voice those banks have on the reserve bank is through their Class A and B directors.
At April’s meeting, there was discussion about whether to raise rates – which is why those three reserve bank presidents dissented in the language of the press release. To no one’s surprise, inflation is rising and rising rapidly. The Personal Consumption Expenditures Price Index, said to be the one favored by the Fed rose an astonishing 8.3 percent annualized rate in March. It was 4.6 percent the month before. Wherefore art thou oh 2 percent? With the price effects of the tariffs coupled with the spike in energy prices the Fed might be tempted to raise rates if it thought the inflation would be prolonged. Speaking of energy prices, its price index grew 11.6 percent in March. That rate is certainly not sustainable. Of course, energy prices will fall albeit slowly when the crisis in the Middle East abates but the core inflation absent energy prices remains high – in the 3.6 percent range. The implication is that inflation is going to be persistent and with us a while. The question will be “what will Warsh do?”
haroldblackphd.com 