What Fed Chairman Means for Interest Rates and the Dollar

With Kevin Warsh as the Fed chairman-designate, Donald Trump is making a move that immediately gives the dollar some breathing room. Markets are reacting with relief, but the question remains how independent the central bank will truly remain. Will Warsh soon chart his own course as vigorously as Jerome "Jay" Powell is now?

Will Trump regret appointing Warsh as Federal Reserve chairman as much as he did his previous appointment? In recent months, current Fed Chairman Powell has come under heavy fire because, in Trump's view, he's keeping the policy rate too high. This is somewhat hindering economic growth. Earlier this year, Powell was even summoned because a renovation of the Fed headquarters had gone way over budget. It's almost easy to forget that Powell was nominated by Trump himself in 2017. For now, however, Warsh seems the ideal choice to keep all sides happy.

Gold and silver plummet
His recent statements suggest he believes interest rates could be lowered a few notches. That's music to Trump's ears. On the other hand, he seems to be pushing things less in this regard than some other potential candidates for Fed chair. Immediately after Warsh's nomination, gold and silver prices plummeted. Investors have flocked to precious metals in recent months, fearing the White House would gain too much influence within the central bank. A combination of a policy rate that's too low and a high budget deficit could erode the dollar's value. Warsh's nomination has made that scenario much less likely.

Dig deeper
In fact, anyone who digs deeper into Warsh's previous statements quickly sees that he pays at least as much attention to the risk of inflation as to economic growth. Just before the credit crisis erupted in 2008, he stated that high inflation was a greater risk than mass layoffs. Even during the recession of early 2009, Warsh was more concerned about inflation that was too high than too low. If history is any indication, he won't hesitate to slam on the interest rate brakes if prices rise too quickly. For now, US inflation appears to be slowly sliding back toward the 2% target level, giving Warsh some room to give the economy a boost after his appointment.

Pressure from the boiler
The force of that push, however, is somewhat less than what other potential Fed chairmen had in mind. Financial markets therefore reacted with relief to the nomination. Besides falling precious metal prices, this was also reflected in a recovery of the dollar. The currency had been under heavy fire in recent weeks as foreign investors sold their investments in US stocks and other assets. Some parties were already speculating that the European Central Bank would have to lower its policy rate. Economically, the strong euro is increasingly hurting. But Warsh's nomination has, at least for the time being, taken some of the pressure off in this regard.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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