Kevin Warsh sees Federal Reserve success as having no one talking about inflation. To achieve that, the Fed chair nominee will likely not get to please the president who appointed him any time soon.
Just over an hour before Warsh began his confirmation hearing in Congress on Tuesday, President Donald Trump made it clear once again where he stood on interest rates - telling CNBC he would be disappointed if the new Fed chair did not lower borrowing costs immediately on taking office.
For all the "regime change" rhetoric, data investigations and balance sheet rethinks that Warsh laid out as his program for the central bank, he faces a fiendishly difficult task meeting his own definition of price stability before year's end.
Channeling former Fed boss Alan Greenspan's view of the inflation target, Warsh defined price stability — one of the central bank's two congressional mandates — as a rate of price change "no one is talking about."
In other words, it's the point at which price changes no longer affect the decisions of households or businesses - the level Greenspan had in mind when settling on 2% as a target.
On the Fed's other mandate, Warsh said the economy was close to full employment.
But quieting business and household concern about price rises may take many months at minimum, amid an oil shock that's already sent headline inflation soaring to near two-year highs and more than a full percentage point above the Fed's 2% target.
Core inflation gauges tracked by the Fed were already a point above target before the Iran war began. Few Americans are likely to stop talking about — or acting on — inflation for many months to come.
Consumer expectations for inflation over the next year surged a full point to 4.8% this month to their highest in seven months, according to the University of Michigan's latest poll. And ISM surveys show businesses recording their highest input prices last month since the inflation surge of 2022.
By any measure, the U.S. is not experiencing price stability. And if "no one talking about it" is the goal, we are a long way from there.
STOP THE TALKING
Warsh's line may have been a tad throwaway, of course, and his broader testimony offered a more forensic take on how he saw the economy and reform of the Fed - allowing perhaps more wiggle room than that blunt definition implied.
The prospective new chair, who takes the helm from Jerome Powell next month if confirmed, spoke of examining problems in inflation data collection, a potential artificial intelligence productivity wave, pre-emptive policymaking and a gradual reduction of the Fed's giant balance sheet that could allow more room for rate cuts.
Even if all that eventually built a case for easing, the clamor about prices from workers and companies makes it almost perverse to open his tenure with rate cuts.
Markets understand that - at least since the recent oil shock. Futures pricing puts less than a 50% chance on any Fed cut this year, with a further reduction not fully priced in for at least 12 months.
For investors who bet a Trump-appointed Fed chief would deliver what the White House wants, the clouds have darkened. And Warsh's extensive focus on reducing the balance sheet in his hearing just tightens the picture at the margins.
Based on all that, Trump is highly likely to be disappointed - not least in a midterm election year.
On the question of direct political pressure, even if not explicit, Warsh's take was that "inflation is a choice and the Fed must take responsibility for it." Government is entitled to its views, he added. "Fed independence is largely up to the Fed."
Not everyone agrees, not least given the legal case against Powell, which the current Fed chair himself says is simply a "pretext" to force him to cut rates further.
Former Fed economist Claudia Sahm was blunter still, writing on Tuesday that "Warsh's platitudes ignore the current reality. Trump's pressure on the Fed is far beyond words."
"Central bankers who oppose Trump's views on interest rates do not need to be "strong enough to listen" - they need to be personally wealthy enough to cover the legal fees of cases brought against them in retaliation," she wrote.
Warsh's honeymoon may not last long if he can't convince Fed colleagues of his sweeping new vision for the central bank - or stop Americans talking about inflation.
(The opinions expressed here are those of Mike Dolan, a columnist for Reuters.)
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