Kevin Warsh may be headed for one of the hardest jobs in Washington. If he takes over the Federal Reserve in May, he could walk straight into a split-screen economy.
Inflation may still be too high. The job market may be getting weaker. Energy prices may be pushing costs up again. That would leave Kevin with a rough choice from day one: hit inflation harder, or try to protect workers from more damage.
The Fed is supposed to do both parts of its job at the same time. It has to keep prices stable and support full employment. There are only three basic ways to handle that. Officials can raise interest rates and cool demand to fight inflation.
They can cut rates to help growth and hiring. Or they can leave rates where they are and try to keep some balance. The problem is that current conditions may not let Kevin stay comfortable in the middle for long.
Why did Senator Tillis blocked Kevin Warsh’s Fed nomination?
Before Kevin can deal with rates, inflation, and jobs, he still has to get through the Senate. Senator Thom Tillis said Tuesday that there is nothing Kevin could tell him to make him drop his blockade.
Asked at the U.S. Capitol whether Warsh could say anything in a later meeting that would change his mind, Tillis replied, “No, no.”
Tillis said his stand is not personal. “This is not about people, it’s about process,” he told reporters. “I think this is a foul.” He has vowed not to vote for any Fed nominees, including Kevin, until the criminal investigation tied to Chair Jerome Powell is finished.
Powell has denied wrongdoing. Powell has also said he is really being targeted because he refused to cut interest rates as broadly and as quickly as President Donald Trump wanted.
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After meeting Kevin, Tillis said he would vote against advancing the nomination from the Banking Committee if the Powell probe is still unresolved by then.
Tillis framed the dispute as a fight over central bank independence. “This is about this is bedrock principle of Fed independence,” he said.
He also said he had “no earthly idea” what market reaction would have been if people started to think the Fed chair served at the pleasure of the president.
Tillis said another unresolved issue is still hanging over the Fed.The Supreme Court has not yet ruled on whether Trump has the power to fire Fed Governor Lisa Cook.
Trump said he wanted to remove Cook because Bill Pulte, head of the Federal Housing Finance Agency, accused her of mortgage fraud.
Lisa has denied wrongdoing. Her defenders say she is being targeted for the same reason Powell is: she opposed Trump’s demands for faster and broader rate cuts.
Tillis called the effort to fire Lisa “sophomoric.” He added, “Whoever came up with that idea should be fired, too.” Even while blocking the nomination, Tillis made clear that he does not view Kevin as the problem.
He said he was “already impressed” with Warsh’s skills. He also said, “I’ve known of his work for quite some time, and that’s why I’m so frustrated that I’m not going to be able to cast a vote until we dispose of the other issues.”
Tillis also pointed to Powell’s testimony before the Senate Banking Committee about the multibillion-dollar renovation of the Fed’s headquarters in Washington. Powell has said he is under investigation by the U.S. Attorney’s Office in Washington over that project and over his testimony to the committee.
Tillis said, “We had seven members of the Banking Committee who were witnesses at the alleged scene of the crime who said no crime was committed.” He then asked, “Why are we even still having this discussion and holding up a great nominee?”
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Tillis added, “I think it goes back to a young U.S. attorney with a dream, with a bogus basis for an investigation. They need to acknowledge that and step away from it so we can get him confirmed.”
Kevin Warsh will inherit sticky inflation, weak wage growth, and a market that may be reading the Fed wrong
The economic backdrop waiting for Kevin looks just as difficult as the political one.Bank of America data showed consumer spending rose 3.2% in February from a year earlier.That was the biggest increase in more than three years.
At the same time, the income picture was badly uneven. After-tax wage growth for top earners rose 4.2% on an annual basis. For lower earners, it rose only 0.6%. Bank of America said that gap is the widest in its data going back to 2015.
Officials may also have to decide whether to look past a temporary jump in oil prices. That becomes more likely if fresh signs show consumers, especially people at the lower end of the income ladder, are dealing with both higher prices and a weaker labor market at the same time. That is where the policy trap gets ugly. If inflation stays sticky because of energy, but hiring starts to wobble, Kevin may have no easy answer.
Bank of America economists also said traders may be reading the situation the wrong way. Markets have recently scaled back hopes for rate cuts because many traders assume the Fed will automatically put inflation first. Right now, the first expected cut has been pushed to September. A second cut is no longer priced in until 2027.
