What would Kevin Warsh bring to the Federal Reserve?

On Friday, President Donald Trump announced his nomination for the next chairman of the central bank: Kevin Warsh. In line with the president, Warsh thinks interest rates should be lower and is said to have played a key role in the government's rescue of Wall Street during the 2008 mortgage crisis. 

If confirmed by the Senate, he’d replace Jerome Powell, whose term expires in May. Warsh has been a vocal critic of the Federal Reserve.

“In effect, a professional Federal Reserve critic,” said Christopher Low, chief economist at FHN Financial in New York and a close watcher of Fed policy.

Kevin Warsh served as Fed governor from 2006 until 2011, a time span that included the financial crisis and the Federal Reserve’s efforts to stabilize Wall Street. During his time at the Federal Reserve, he penned an opinion piece for the Wall Street Journal in September 2009 in which he advocated for aggressive interest rate hikes. The Fed wouldn’t raise interest rates until 2015.

He was also a critic of the Federal Reserve’s quantitative easing.

“That's the program they used to expand their balance sheet, buying long-term debt to make long-term interest rates go down,” Low explained. “He actually resigned from the Fed in 2011, because the Fed announced a second quantitative easing round. He resigned in protest.”

Currently, Warsh is a visiting fellow in economics at Stanford’s Hoover Institution, a conservative-leaning think tank. He recently criticized the Federal Reserve, saying that it has not done enough in the past to fight inflation.

“The central bank can hit any price level that it wants, any inflation level that it wants,” he said in a speech at the Hoover Institution. “We might not like how they do it, but the idea that they should be blaming someone else strikes me as quite antithetical to good economic history.”

Warsh believes the Federal Reserve should lower interest rates more — a move President Trump has been pressing for — arguing that doing so won’t trigger more inflation, because artificial intelligence and its advancements will boost productivity. Higher productivity has historically been a deflationary force.

Additionally, Warsh wants to shrink the Fed’s balance sheets, although the net effect may not help in easing rates.

“The Fed is the biggest holder of mortgage debt and Treasury debt in the world,” Low said. “If they actively sold that debt, it would cause those interest rates to go up. So, long-term rates for houses, for cars, that kind of thing, would actually rise — even as the Fed cut short-term rates.”

The Fed chair nominee also wants less intervention in financial markets and a more hands-off approach toward bank regulation. And, when interviewed this summer on Fox News, Warsh said he thinks the new chair needs to go in and break some heads.

“What he was referring to specifically was a question about how he would build consensus on the FOMC,” Low said. “Because, of course, the Fed chair doesn't set policy; it's a group decision. There's 19 members of the committee, 12 of them vote, and rallying consensus is viewed as one of the biggest challenges of anyone trying to lead the Fed.”