After months of speculation, US President Donald Trump confirmed he will be nominating Kevin Warsh as the next chair of the US Federal Reserve. The appointment has been closely watched in the context of Trump’s ongoing conflict with the Fed and its current chairman Jerome Powell.
The immediate reaction to the announcement was a significant crash in gold and silver markets. After months of record highs and stretched valuations, spot prices for gold and silver dropped 9% and 28% respectively after the announcement. The US stock market also fell, with major indexes all reporting modest losses.
However, in the context of concerns over Trump’s interference with the Fed, the market crash can ironically be understood as an early vote of confidence in Warsh’s independence and suitability for the role.
Understanding why requires the context of Trump’s ongoing conflict with the Federal Reserve, and the importance of central bank independence to our current global financial system.
Trump’s war with the Fed
The last year has seen Trump in an unprecedented conflict with the Federal Reserve.
Trump appointed current Chairman Jerome Powell back in 2017. However, the relationship quickly soured when Powell did not cut interest rates as quickly as Trump wanted. In characteristically colourful language, Trump has since called Powell a “clown” with “some real mental problems”, adding “I’d love to fire his ass”.
The war of words descended into legal threats. Trump’s Justice Department announced an investigation into Federal Reserve Governor Lisa Cook over alleged fraud in historical mortgage documents. Then last month, in a shocking escalation the Justice Department opened a criminal investigation into Powell relating to overspending in renovations of the Federal Reserve offices.
Federal Reserve Chairman Jerome Powell has been targeted by President Trump for not slashing rates.
Shawn Thew/EPA
Both sets of allegations are widely viewed as baseless. However, Trump has tried to use the investigation as grounds to fire Cook. The case is currently before the Supreme Court.
Powell has hit back strongly at Trump, saying the legal threats were
a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President.
Powell received support from 14 international central bank chiefs, who noted “the independence of central banks is a cornerstone of price, financial and economic stability”.
Historically, presidential interference with the Fed was a major cause of the stagflation crisis in the 1970s. More recently, both Argentina and Turkey have experienced significant financial crises caused by interference with central bank independence.
Who is Kevin Warsh?
Kevin Warsh is a former banker and Federal Reserve governor, who previously served as economic advisor to both President George W Bush and President Trump.
Originally Trump seemed likely to favour the current director of Trump’s National Economic Council, Kevin Hassett, for the job.