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If confirmed as chair of the Federal Reserve, is Kevin Warsh going to be an inflation hawk or Donald Trump’s poodle? His repeated statements on monetary policy and the broader obligations of the Fed suggest the former. But his more recent statements on the inflation outlook and the fact that Trump chose him very much suggest the latter. More broadly, is he a man of conviction and judgment or is he a weathervane, blowing with the wind from the Republican side of politics and so in favour of loose monetary policy when Republicans are in power and of tight money when the Democrats are?

Warsh’s words indicate that he is very much the “hard money” central banker. Notably, in a speech to the Shadow Open Market Committee in New York given in March 2010, when the US economy was, remember, still struggling with the deeply recessionary aftermath of the 2008 financial crisis, he had already started worrying about Fed credibility.

He made four main points. First, Fed independence applies only to monetary policy, not “regulatory policy, consumer protection or other responsibilities granted to the Federal Reserve”. Second, the “Fed, as first-responder, must strongly resist the temptation to be the ultimate rescuer”. Third, “governments may be tempted to influence the central bank to keep monetary policy looser longer to finance the debt and stimulate activity”. But the “only popularity central bankers should seek, if at all, is in the history books”. Last, “central banks, here and abroad, have worked for decades to get inflation down to levels consistent with price stability. We should not risk these hard-won gains.”

Intellectually, at least, today’s Warsh appears the same as the one of 2010. In his IMF lecture delivered in April 2025, he stressed not only the Fed’s “institutional drift”, but also its recent “failure to satisfy an essential part of its statutory remit, price stability. It has also contributed to an explosion of federal spending. And the Fed’s outsized role and underperformance have weakened the important and worthy case for monetary policy independence.” He made other criticisms, the most pointed being that “the Fed has been the most important buyer of US Treasury debt — and other liabilities backed by the US government — since 2008”. He asserts: “Fiscal dominance — where the nation’s debts constrain monetary policymakers — was long thought by economists to be a possible end-state. My view is that monetary dominance — where the central bank becomes the ultimate arbiter of fiscal policy — is the clearer and more present danger.” For Warsh, then, easy money is the road to ruin.

So what has persuaded Trump, who is fiscal dominance incarnate, and has been berating poor Jay Powell as a “jerk” for not cutting interest rates faster, to appoint Warsh chair, apart maybe from his good looks? One reason might be that he likes Warsh’s hostility to the Fed’s “woke” over-reach. Another might be that he likes his inclination towards financial deregulation. Yet another might be that he is a relatively orthodox choice, whose appointment should calm nervous markets (as it has, so far). But a crucial point must be that Warsh has conveniently concluded that inflation is no longer a threat, because of technology-fuelled productivity growth. That might even be right. As Warsh notes, Alan Greenspan made a similar bet about the impact of the internet in the 1990s. But it is a bold leap for a man who feared inflation back in 2010, in the midst of a deep slump. If he got his way, he would be replacing the “data-dependency” of the Fed with a hunch. Given the huge US fiscal deficits and debts and the US economy’s fast growth, that would be a big gamble.

How then might the choice of Warsh play out? I actually agree with some of Warsh’s criticisms of the Fed, notably over its drift into areas that are not part of its core functions. I agree, too, that the post-pandemic inflation was in part its fault: together with other central banks, it failed even to consider that the jump in the money supply in 2020 might lead to a jump in the price level. I also agree with Warsh that the backward-looking monetary policy framework introduced in 2020 was a conceptual and practical error (not to mention grossly mistimed).

It is comforting, too, to note that the Fed is an institution. The Fed is far more than the chair. Its leadership matters hugely. But Warsh would be unable to ride roughshod over other members of the Federal Open Market Committee or even its staff, at least in the short run.

Yet worries remain, on two fronts. The first is that Warsh might be far too willing to argue for whatever Trump wants, even though this would mean accepting fiscal dominance, in spades. It also appears that he intends to justify doing so by offsetting lower short-term rates with higher longer-term ones, as the Fed’s balance sheet is aggressively shrunk. At the same time, the US Treasury is likely to shift further towards short-term financing. With a more strongly upward-sloping US yield curve, the likely outcome would be greater demand for dollar financing at the short end, and less demand at the long end. Above all, given the decline in banks’ reserves and financial deregulation as well, the balance sheets of the financial sector would become more fragile. The incentive to hold the dollar might also fall, as short rates decline and fear of inflation jumps. The result might be another financial crisis.

Yes, Warsh is a better candidate than many of the others on the list. But he is a confusing, perhaps confused, figure. The US and the world need a Fed chair who will stand up to Trump. To his credit, Powell has proved himself to be such a man. Will Warsh?

martin.wolf@ft.com

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