Dive Brief:

• President Donald Trump nominated Kevin Warsh, a former Federal Reserve governor, as his pick to succeed Fed Chair Jerome Powell, according to a Friday social media post on the president’s Truth Social account. 
• “I have known Kevin for a long period of time, and have no doubt that he will go down as one of the GREAT Fed Chairmen, maybe the best,” Trump said in the post which was pinned to his account. “On top of everything else, he is ‘central casting,’ and he will never let you down.”
• Powell, who was nominated by Trump in 2017 to replace Janet Yellen, has served as chair since February 2018. His term as Fed chair expires in May. Trump’s nominee must still be confirmed by the Senate.  

Dive Insight:

In Warsh, Trump has picked a central bank and Morgan Stanley alum who has evolved from an inflation “hawk” into a Fed critic whose views are more aligned with the president’s calls to lower interest rates. 

Warsh served on the Fed’s Board of Governors from 2006 to 2011, becoming at 35 the youngest Fed governor ever, according to Trump’s post. Currently he is a lecturer at the Stanford Graduate School of Business and a distinguished visiting fellow in economics at the Hoover Institution, a public policy think tank at Stanford University in Stanford, California. 

Now 55, Warsh, who also earned a J.D. from Harvard Law School, would bring deep economic policy experience to the position. Before joining the Fed, he served as special assistant to the President for Economic Policy and Executive Secretary of the White House National Economic Policy from 2002 to 2006. Prior to that, he worked for Morgan Stanley & Co. in New York in the bank’s mergers and acquisitions department. 

Laying out his views in a November opinion piece for The Wall Street Journal titled “The Fed’s Broken Leadership,” Warsh predicted that AI will be a “significant disinflationary force” and called for the Fed to ditch its “dogma” that inflation is caused by an economy growing too much — asserting instead that it is caused by the government spending too much. 

“Money on Wall Street is too easy, and credit on Main Street is too tight. The Fed’s bloated balance sheet, designed to support the biggest firms in a bygone crisis era, can be reduced significantly,” Warsh wrote in the opinion piece. “That largesse can be redeployed in the form of lower interest rates to support households and small and medium-size businesses.” 

The president’s nominee decision comes after the Fed held the main rate steady at a range between 3.5% and 3.75% Wednesday, a decision which came amid Trump’s pressure campaign to push Powell to cut the main interest rate to as low as 1%. Earlier this month the Trump administration drew bipartisan fire from lawmakers for launching an investigation into Powell’s congressional testimony in June about renovations of the Fed’s headquarters that the lawmakers said jeopardized the central bank’s independence. 

On Thursday, Trump took to social media once again to attack Powell, calling him “Jerome ‘Too Late’” and complaining that “Powell refused” to cut interest rates and is “costing America Hundreds of Billions of Dollar a year in totally unnecessary and uncalled for INTEREST EXPENSE.”  

The Fed’s decision this week included two dissents, with policymakers cautioning that inflation persists above their 2% goal while not expressing the same degree of concern about weak hiring that prompted them to trim the benchmark interest rate last year. Powell on Wednesday declined to say when he expects the central bank will resume reductions in borrowing costs.

Though stocks were lower in midday trading Friday, many analysts and finance executives seemed to be unfazed by the choice of Warsh, or encouraged by the prospect of easing. “This is a pretty market friendly pick,” Scott Helfstein, head of investment strategy at Global X ETFs said Friday in a statement emailed to CFO Dive, adding, however, that Warsh’s interest in shrinking the Fed balance sheet could drive some volatility in the rates market. 

In a Friday note, JPMorgan Chief U.S. Economist Michael Feroli stated it was unclear what Warsh’s “true leanings” are and whether he would be able to persuade the rest of the FOMC to follow along with his pro-cut views. 

“Our best guess is that this year he will make the case for rate cuts,” Feroli said in the report shared with CFO Dive. “We’d also suspect that as time goes on, his leanings will be more open to revision and perhaps reversion back to a more hawkish view, particularly as we get past the midterms and into the last innings of a presumably lame duck administration.”  

Nick Araco Jr., CEO and founder of the CFO Alliance, a subscription peer network for finance leaders, said in an email that mid-market finance chiefs aren’t yet drawing any “hard” conclusions. 

However, Araco said they are concerned about a new chair’s potential impact on the Fed’s independence, with most believing that the Fed maintaining institutional autonomy is essential for CFOs who want to make “durable” capital and investment assumptions. 

For now, CFOs are taking a “prepare, don’t react” posture while actively stress-testing multiple rate and growth scenarios and continuing to update forecasts in real-time, he said. “From what we are hearing, most [CFOs] continue to delay irreversible decisions while keeping execution-ready plans on the shelf,” Araco wrote. “The appetite right now isn’t for bold directional bets.”