The announcement on Friday that Kevin Warsh was nominated to become the next chair of the Federal Reserve resolved a long period of speculation over who would succeed Jerome Powell, whose term ends in May.
But it also raised new questions, not the least of which is what policies Warsh would bring to the role, if he is confirmed by the Senate.
RSM Chief Economist Joe Brusuelas joined Yahoo Finance to offer his thoughts on the nomination. Investors and executives will by trying to glean Warsh’s views over the coming months.
“Is he a man for all seasons, or is he a chameleon?” Brusuelas said.
“He leans to the hawkish side,” Brusuelas said of Warsh’s record, which is in contrast to the administration’s desire for more, and bigger, rate cuts. “He certainly has what we will just call unorthodox views on the radical reduction of the balance sheet.”
Brusuelas said that circumstances had changed dramatically since the Fed began growing its balance sheet in response to a series of economic shocks. For the Fed to return to the way it operated before the financial crisis is not realistic, Brusuelas suggested.
“We’ve got a $31 trillion economy that demands a much larger balance sheet than what existed 20 years ago,” Brusuelas said. “A lot of times when I hear Kevin Warsh speak, I’m hearing an echo of 2007.”
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Brusuelas was blunt in his assessment of Warsh’s hawkish views during a period of economic distress. “He missed the mark,” Brusuelas said of Warsh’s tenure as a Fed governor from 2006 to 2011, during the financial crisis. “He was arguing for an overconcern, and too much of a focus, on inflation at a time when the economy was experiencing a deflationary, depression-like shock.”
With unemployment at the time was on its way to 10%, Brusuelas added. “there is good reason why Wall Street is interpreting this as a hawkish appointment.”
Brusuelas said many questions need to be answered in his nomination process, which could be hampered by the opposition of North Carolina Senator Thom Tillis, a Republican, who on Friday again vowed to block the nomination of a new Fed chair until the criminal investigation into Powell is resolved.
“Will he preserve the central bank independence?” Brusuelas said of Warsh. “What does he mean by reducing the balance sheet? What does he want to go with in reforming the Federal Reserve? And what are his views on reducing the supplemental leverage ratio within the context of financial deregulation?”
