Trump has no luck or talent when it comes to choosing people for his government or entourage. Yes, Melanie may be an exception, but when the president nominated Jerome Powell as chairman of the Fed in 2018, he immediately came into conflict with him. Trump wants complete control over the dollar and financial policy, which is not possible under the Fed’s mandate. Powell acted independently, saw the danger of a return to inflation and did not lower interest rates, which angered Trump, as he wanted to increase the competitiveness of the US economy through a cheaper dollar.
Now Powell’s term is slowly coming to an end, and Trump was looking for a suitable successor. At first, he wanted to nominate Kevin Hasset, the head of the National Economic Council (NEC), but then he realised that he wanted to keep his key adviser close by. So, he opted for the young but experienced Warsh. Will he disappoint him?
There are two camps among central bankers and members of the FOMC: doves, who advocate easing, and hawks, who favour higher interest rates. Warsh is currently pursuing a hybrid approach that combines elements of both camps:
- Easing Contrary to his former reputation as an inflation hardliner, Warsh currently advocates interest rate cuts. He argues that current monetary policy is too restrictive. His thesis: productivity gains (AI and deregulation) could enable the economy to grow faster without fuelling inflation, which would justify lower key interest rates.
- Tightening He remains a hardliner when it comes to the Fed’s balance sheet. He calls for a significant reduction in the central bank’s balance sheet (active quantitative tightening – QT) and less market intervention. He believes that a smaller balance sheet reduces market distortions and creates the scope for permanently lower short-term interest rates.
Yes, AI is a key argument in his logic. According to Warsh, it is responsible for the “performance miracle” that is essentially disinflationary. If companies can use AI to produce more goods and services at lower costs, this increases supply. The effect? It is assumed that a larger number of raw materials on the market at lower manufacturing costs naturally prevents price increases (inflation), even when the economy is growing rapidly. However, in this case, growth is not the result of printing empty currency, but the result of increased productivity. Warsh compares this situation to the internet revolution of the 1990s, when inflation remained low despite an economic boom.
However, this may be a misconception, as AI consumes enormous amounts of energy, chips and resources for data centres, which could increase the prices of these specific services and raw materials in the short term. The performance effect should only occur in a few years, which could trigger inflation before AI can suppress it. Many analysts are also critical of the reduction in the central bank’s balance sheet. Let’s see if the Senate will accept Warsh’s nomination. In any case, it could cause turmoil in the markets.
