Federal Reserve Chairman Jerome Powell, and Federal Reserve Nominee, Kevin Warsh.
Reuters
When the Federal Open Market Committee gathers again in mid-June, it will mark the first time in nearly 80 years that a sitting and former chair conduct business together, a historic overlap that comes at a sensitive time for the central bank.
While the scenario could look something like the clash of the policy titans, the meeting with the incoming Chair Kevin Warsh and outgoing Jerome Powell likely will be less antagonistic — though still carrying high stakes for policy.
“Both Kevin and Jay will be able to interact, and I think the rest of the FOMC will be able to interact, although I grant that it may be challenging,” said Loretta Mester, who served as Cleveland Fed president until 2024 and knows what happens behind the doors of the committee meetings well. “They’re all adults, and they all know what the mission of the Fed is, and I’m very confident that that’s what will drive decision making, not any of these other things that people are worried about.”
Though Mester and other observers expect the collegial reputation of the Fed to prevail, the potential for drama is unmistakable. The unusual situation raises the possibility for competing policy positions, even if expressed subtly, as the markets await the Fed’s next move.
After all, Warsh himself has called for “regime change” at the Fed, a direct shot at Powell’s leadership. Moreover, President Donald Trump, who nominated both men, has been a severe Powell critic and has made no secret that he expects Warsh to lower rates.
Finally, Powell’s apparent last turn as Fed chair underscored the potential fault lines, with a stunning four dissents from the post-meeting statement, mostly from members who objected to a subtle phrasing in the document that could be interpreted as a signal of policy easing ahead.
Regional presidents stand tough
For those with a fertile imagination, the three “no” votes — from regional presidents Neel Kashkari of Minneapolis, Lorie Logan of Dallas and Beth Hammack, who succeeded Mester in Cleveland — could be seen as a shot across the bow at Warsh in his quest to lower interest rates.
“Kevin Warsh is not going to, I don’t believe, be able to come in there and convince his colleagues that this is the time to cut rates,” Mester said. “He’s also going to want to evaluate the economic situation before he can argue that it’s time to start moving interest rates again.”
Indeed, current economic conditions provide little ammunition to argue for policy easing.
Fresh data Thursday showed core inflation running at 3.2% in March, well ahead of the Fed’s 2% target as the Iran war and its impact on oil prices is compounding with tariff fallout to keep consumer prices elevated.
At the same time, weekly jobless claims tumbled to their lowest level since September 1969, providing more evidence that the labor market is at least stable as layoffs hold at their lowest level since the early years of former President Richard Nixon.
The data, then, present another potential for clashes at the FOMC. The last time a Fed chair remained on as a governor after stepping down was in 1948, when Marriner Eccles stayed on amid tensions with the Truman administration
Economic, political pressure
“One should expect that any further pressure on the Federal Reserve to cut rates due to the political cycle will result in a much further, a much more severe push back, not just by Jay Powell, but other members of the Federal Reserve,” said Joseph Brusuelas, chief economist at RSM.
The climate is ripe for further clashes at the FOMC, he added.
“This is what happens when one witnesses an assault on the central bank independence of the Federal Reserve,” Brusuelas said. “I don’t think that there will be a poisonous atmosphere on the Fed or an adverse relationship between Powell and Warsh. However, it would not surprise me if Powell ends up being the swing vote on any move to cut interest rates prematurely.”
In announcing Wednesday his intention to stay on at the Fed after his term as chair expires in May, Powell played down any chance of a rivalry, insisting he won’t be intent on thwarting Warsh’s agenda and vowed not to be a “shadow chair.”
Instead, he focused on his desire to wait for a conclusion into the inspector general’s investigation of the Fed headquarters renovation. Powell tamped down expectations of an internal rivalry, even while acknowledging the broader political tensions.
“I plan to keep a low profile as a governor. There’s only ever one chair,” Powell said, adding that he had no desire to be “a high-profile dissident or anything like that.”
“I think this is, and will be, a very normal, standard kind of a transition process,” he added.
Warsh could not be reached for comment.
Like Mester, former Fed Vice Chair Roger Ferguson expects Powell to be good to his word, even with the looming potential for policy differences.
Ferguson also shares the confidence Powell expressed in Warsh to keep the Fed focused on its primary goals of low inflation and full employment, though he will have “walk a fine line, because it’s pretty clear he doesn’t have the votes for any immediate action, certainly not lowering rates in the near term.”
“I think he is not interested in becoming an alternative power source, a shadow chair, anything of that sort. He’s expressed confidence in Kevin Warsh and Kevin Warsh’s ability, and I share that confidence,” Ferguson said Thursday on CNBC. “So I think this is really not an effort to do anything other than maintain independence of the Fed and, frankly, clear his name once and for all.”