Trump’s trouncing gives Warsh more room for manoeuvre on rates

Donald Trump’s sweeping rebuke by voters on Tuesday could lift a shadow from Federal Reserve Chair Kevin Warsh, allowing him to focus — with less political distraction — on bringing inflation to heel.

That’s an early takeaway from some Fed watchers who say the Republican Party’s crushing election defeat — with voters citing the cost of living among their top concerns — has turned the political dynamic around the central bank on its head.

“Warsh and Co can now focus on monetary policy,” said Mark Spindel, an investment manager at Potomac River Capital who co-wrote a history of Fed independence. “Warsh wants his legacy to be a good one. But they have to get to work.”

Trump has loomed over the central bank and its rate decisions since his reelection in 2024. He’s repeatedly called for lower rates, supported an unprecedented criminal investigation into building renovations and attempted to dismiss a sitting governor.

Amid all that, he chose Warsh to helm the Fed in May after Warsh had taken an uncharacteristic turn toward supporting lower interest rates. That prompted worries from Democrats that the new chair had agreed to bend policy to the president’s liking.

Lingering worries

Warsh has done a fair amount to prove those fears wrong. With inflation above the Fed’s target for more than five yeas and re-accelerating this summer, Warsh defied sceptics of his willingness to face down political criticism by raising rates in September. His comments after the Fed’s October meeting also helped reinforce expectations for another hike in December.

Still, Warsh led the decision to hold rates steady just ahead of the midterm elections even after a hot September inflation report. He insisted the elections played no role, but that move, and his consistent stinginess in sharing his outlook for the economy, has fostered lingering worries that he’s wary of provoking the president.

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The election drubbing could change that.

Daleep Singh, chief global economist at PGIM, and a former senior official in the Biden administration suggested the election helps the Fed, not only by rebuking Trump, but by pointing policymakers at the problem voters want fixed.

“The question is whether, with the president’s grip on the country being loosened and voters clearly saying the cost of living was the number one issue in this election, does Kevin Warsh and the Fed read that signal and do their job?” Singh asked Wednesday on Bloomberg Television. “Our view is, yes.”

Singh predicted the Fed will lift rates by a full percentage point over the next year.

The election could also serve simply to distract Trump and the White House, diluting their interest in targeting the Fed, said Stephen Myrow, a managing partner at Beacon Policy Advisors and former Treasury official in the George W. Bush administration.

“Trump is gonna have a lot of other fish to fry,” Myrow said. “So the Fed isn’t going to get the same focus that it might have gotten before.”

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Life after Trump

At the same time, Warsh may now think more about life after Trump. His term as chair extends to 2030, well into the next administration.

“Warsh was already going to outlast Trump and so always had a motivation to push back,” said Tim Duy, chief US economist at SGH Macro Advisors.

Other analysts, however, warned against assuming that interest rates would now follow a higher trajectory.

“Everything about the Fed’s pattern of behaviour this year — in terms of holding, raising and holding again — could have happened even if the White House had been totally normal and not yelling at the Fed to lower rates,” Claudia Sahm, chief economist at New Century Advisors, said. “I’d be pretty cautious about saying that, now that the White House has been rebuked, the Fed is going to really get going with rate hikes.”

Indeed, the Fed may not need more rate hikes if the election results push Trump to end the conflict in Iran and back away from additional tariffs. “The actual path of interest rates out of this might actually be lower, not higher,” Sahm said.

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