Commerzbank economists Bernd Weidensteiner and Christoph Balz assess the implications of Kevin Warsh’s potential appointment as Federal Reserve (Fed) Chair for US monetary policy. They argue that Warsh’s criticism of recent Fed policy and focus on AI-driven disinflation could threaten Fed independence and lead to overly aggressive rate cuts over time, but they still expect the next Fed move only toward year-end.

Warsh, Fed independence and rate outlook

"We are also not quite as optimistic as Warsh that AI will significantly lower inflation. We therefore remain generally skeptical that Warsh can defend the Fed’s independence from Trump. Rather, the central bank is likely to cut interest rates more aggressively than appropriate in the medium term."

"Even if Warsh were to take over as chair soon, it is by no means clear whether the Fed would then comply with Trump’s demand for rapid interest rate cuts. After all, inflation has picked up again in the wake of the war against Iran, so the return of the inflation rate to the 2% target is likely to be further delayed."

"As chairman, Warsh would face major difficulties in securing a majority for an interest rate cut at his first meeting in June. If rates remain unchanged, Warsh would likely very quickly come under the president’s scrutiny, putting him at risk of facing the same difficulties with Trump as Powell did before him."

"We stand by our forecast that the Fed will likely not be able to deliver the next interest rate move until toward the end of the year. After all, Warsh will need some time to assert himself within the Fed."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)