Trump's pick for Fed Chair
Policy fog now begins to lift after this week's rate-cut pause.
BOTTOM LINE
In a long-awaited and much-anticipated decision, President Trump nominated Kevin Warsh to be the next chairman of the Federal Reserve (Fed) this morning. We expect the Senate Banking Committee to vet Warsh in March, with a full Senate confirmation vote in April. While current Chair Jerome Powell’s term expires on May 15, he can—in an interesting quirk—choose to remain on the Fed’s Board of Governors until January 2028.
At its policy-setting meeting this past Wednesday, as we and many others had expected, the Fed left the federal funds rate unchanged at a three-year low of 3.50-3.75%. The Fed cut interest rates by a total of 75 basis points last September, October and December 2025—and by a collective 175 basis points over the past two years—and we believe that it was appropriate for the central bank to pause at this week’s meeting to digest these recent cuts.
But this week’s policy decision was not unanimous. With a 10-2 vote to leave interest rates unchanged, the two dissents—Governors Christopher Waller and Stephen Miran—both voted for another quarter-point cut.
However, there were bigger and more important questions left unanswered by the Fed’s statement and Chair Powell’s press conference on Wednesday. To wit, what’s the status of the Fed’s impending leadership transition and the subsequent trajectory of its monetary policy? With Trump’s nomination of Warsh this morning, we begin to get some clarity on these issues.
Inflation update
During his presser, Powell referenced the Fed’s estimate for core PCE inflation (its preferred measure of inflation) to rise by 3.0% y/y in December 2025, up from an actual reading of 2.8% y/y in November. The Fed’s long-term goal for core PCE inflation is still 2.0%, a level unseen in five years.
But nominal and core CPI retail inflation finished 2025 at 2.7% and 2.6%, respectively, which are at nearly five-year lows. With the upper band of the fed funds rate now at 3.75%, there appears to be plenty of room to reduce interest rates further over time. However, nominal and core PPI wholesale inflation for December 2025 were reported this morning at hotter-than-expected levels of 3.0% and 3.3% y/y, respectively. Nevertheless, December’s core PCE is expected to sequentially slip to 2.9% when reported later this month.
Productivity soaring
From a decline of -1.2% in the first quarter of 2025, productivity surged by 4.4% and 4.9%, respectively, in last year’s second and third quarters. This is due to the 100% expensing provision for capital spending in the One Big Beautiful Bill that President Trump signed into law last July, which should help to moderate inflation over time. Fed Chair Alan Greenspan drew a similar conclusion in the 1990s, a view that Chair-designate Warsh shares now.
Fed on hold in March?
While we’ve telegraphed the potential for another rate cut on March 18, recent political developments make that less likely. The federal government may shut down again this weekend. Congress orchestrated a record six-week shutdown in October and November over a disagreement on health-care funding, and the government is still catching up from that data backlog.
Today, Senate Democrats are threatening to withhold support for a federal spending package in response to two tragic deaths in Minneapolis recently, unless the Department of Homeland Security (DHS) and Immigration and Customs Enforcement (ICE) are overhauled. Even if the Senate comes to a last-second agreement, the House of Representatives is in recess, so they would have to return to Washington and vote on the new package.
Fed independence is sacrosanct
Fed Governor Lisa Cook is accused of personal mortgage fraud, and Chair Powell has been subpoenaed over cost overruns on the Fed’s building renovation project. Both appear to be thinly veiled attempts to influence the direction of the Fed’s monetary policy decisions, and the Fed Board is unlikely to cut rates again with this Sword of Damocles hanging over its collective head.
Trump has discussed many times that he expects the fed funds rate to decline to 1% over time, but we see no economic justification for a rate level quite that low, absent a recession, which is not in our forecast. Rather, we are still expecting three more quarter-point cuts over the next year or so, but that would take the terminal value of the fed funds rate down to 3.0%, with core inflation bottoming at 2-2.5%.
That’s the critical reason for Fed independence. We don’t want Congress or the White House to make interest rate decisions, because they would lower rates to boost the economy and enhance their own re-election prospects, without regard to any inflationary consequences.
Fed competence is important, too
As inflation was soaring in 2021 due to excessive fiscal stimulus, the Fed neglected to hike interest rates, arguing that the inflation spike was “transitory.” They threw in the towel by March 2022 and started to raise interest rates. But by then, the horse was out of the barn, with inflation peaking at 40-year highs in 2022. We’re still paying the price for that monetary policy error today.
'Right out of central casting'
Trump is excited about his selection of Warsh, who received his AB from Stanford and his JD from Harvard. Like Chair Powell, however, he does not have a PhD in economics. Warsh did serve as a member of the Fed’s Board of Governors under Chair Ben Bernanke from 2006 to 2011, and he has served on the National Economic Council under President George W. Bush. Warsh has financial markets experience at Morgan Stanley.
Warsh has developed a reputation as a hawk with his focus on combatting inflation, and he prefers a smaller Fed balance sheet and lower interest rates. As a supply-sider, Warsh would introduce much-needed balance to the Fed’s current Keynesian-heavy thought process, and he has been a critic of the Fed’s so-called “mission creep” in recent years. In addition, Warsh appears committed to expanding and improving the working relationship between the Fed and the Treasury Department.
As an outsider from the Trump White House, he may have an easier time receiving Senate confirmation. However, Thom Tillis (R-NC), who sits on the Senate Banking Committee, has said that he will oppose advancing Warsh’s nomination to the full Senate for a confirmation vote until the federal investigation into Chair Powell is concluded. Trump could simply end the investigation into Powell and Cook now to move the ball forward with Warsh.
Once confirmed in coming months, we expect that Warsh will take Miran’s seat, which is scheduled to expire this weekend. Miran will stay on the Fed until his replacement is confirmed, at which point he will likely return to his prior role as Chair of the Council of Economic Advisors (CEA) under Trump.
Read more about our views and positioning at Capital Markets.