Kevin Warsh’s Fed chair appointment could be a net positive for CFOs

Allow us this one pun: President Trump’s pick for Federal Reserve Chair can’t be wishy…Warshy.

Kevin Warsh, formerly the youngest Fed Board of Governors member at 35 in 2006, is on track to become the next chair of the Federal Reserve after Jerome Powell’s term comes to an end in May.

If confirmed by the Senate, Warsh will have to engage in a delicate dance as chair, navigating persistent and public calls from President Trump to lower benchmark interest rates while buttressing the Federal Reserve’s historic independence.

“He’s going to try to thread the needle of respecting President Trump’s wishes and at the same time respecting institutional processes,” Dennis Lockhart, who served as president of the Federal Reserve Bank of Atlanta from 2007 to 2017 and has worked with Warsh, told the New York Times. “Believe me, that’s going to be quite the tap dance. It’s going to be Fred Astaire as central bank chair.”

No funny business. If his proverbial tap dancing abilities are up to snuff, Warsh’s term shouldn’t usher in any huge surprises or challenges for CFOs, experts told CFO Brew. 

“Typically, what [CFOs] want is: they want stability in terms of the level of rates and shapes of curves, and they want policies that are supportive of their activity,” Padhraic Garvey, regional head of research, Americas, at ING, told us. “We’re not sitting here thinking about, ‘Oh, my word, we’ve got this hawkish central banker coming in who is going to jack rates up to the sky.’ It’s actually the other direction, which should be comforting.”

“Corporates have got to refinance themselves on the capital markets on an ongoing basis,” Garvey added, noting the long-term nature of that refinancing.

“What they don’t want is for a crazy Fed to jack down rates and result in higher long-end rates. It doesn’t feel like that’s going to happen. It feels like what’s going to happen is we’re going to have a Fed and a Treasury combo that does their best to get rates as low as possible. As long as that doesn’t get silly, I would say there are net positives for corporate America.”

But this all depends on a big “if.” So, let’s take a look at Warsh’s tap-dancing skills.

Soft skills. Just like anyone starting a new job, Warsh will have to get his coworkers to like him. Here’s hoping central bankers like donuts.

“It’s not like Warsh can join the committee and do what he wants,” Derek Tang, an economist at LHMeyer who forecasts Fed policy developments, told CFO Brew, emphasizing the need for consensus among voting FOMC members. “When he joins, he’s one of many voices, and he’ll have to convince everyone else to share his view, and that might take a while.”

Outgoing Chair Powell “built up all this internal goodwill” at the Fed over the course of his eight-year tenure, Tang pointed out. “Clearly, Warsh is not in the same sort of position.”

Warsh has, however, demonstrated his ability to navigate through challenging times, particularly during his time at the Fed amid the 2008–2009 financial crisis when he helped former Chair Ben Bernanke with financial institution bailouts.

“At that time, he earned the respect among his colleagues, perhaps unexpectedly, mostly because of the global financial crisis and the network that he had on Wall Street,” Tang said. “One of the big takeaways was that Warsh has excellent soft skills.”

Pressure cooker. He’ll need those people skills. One of Warsh’s primary challenges as Fed chair is demonstrating that his rate decisions aren’t being swayed by political pressure. 

“When Warsh gets quizzed, as he will, that will be the dominant question: To what extent are you President Trump’s guy on the FOMC with an agenda by the president to dictate where rates go?” Garvey said. “And I think he’ll do a fine job at countering those doubts.”

Just one day after his nomination announcement, Trump joked during a speech that he would sue Warsh if he didn’t lower rates, per the Wall Street Journal.

“He has to overcome this presumption of loyalty,” Tang added. “How is he going to overcome that? That’s going to be an uphill battle. I suspect he’ll have to go back to basics and use an economic forecast and use a theoretical framework to try to win over others.”

That shouldn’t be a huge challenge in the near term, as rate cuts look likely this year regardless of who the chair is.

“One of the hopes is that the data will help him out here, that by [the time his tenure starts], we’ll have lower inflation, we’ll have, perhaps, higher productivity,” Tang explained. “That would be perfect for them, because then they could cut rates, and there’s actually a good basis for doing so.”

But if inflation stays high and the employment picture looks subprime, “then it’s sort of tough for them to go a little bit further [on rate cuts],’” he added. “At that point, the question is: How is Warsh going to be able to get that through?”

In any case, he’ll never be operating alone, Tang stressed: “There’s very little Warsh can do without the agreement of his colleagues.”