What might trip up Kevin Warsh and his agenda as Fed chair

Oil prices are surging. Inflation forecasts are rising. Futures markets increasingly raise the chances of a rate hike from the Federal Reserve. 

And then there’s Kevin Warsh and his stated desire — and edict from President Donald Trump — to cut interest rates. 

Even before a hearing is scheduled on his nomination, Warsh’s ambitious agenda for “regime change” at the Fed faces challenges. The most obvious: $100-a-barrel oil prices and the incipient inflation threat they pose run counter to Warsh’s hopes to sharply reduce interest rates.

But the challenges go further. The new chair, once he takes his seat, could come up against resistance to nearly every aspect of his plan to rewrite the central bank’s operating system. Warsh has committed to slashing the Fed’s balance sheet. The overhaul could also include “breaking some heads” at the Fed, as he told Fox News in July, “because the way they’ve been doing business is not working.” That could imply staff changes or bringing in new people, as well as adjustments to the models used to forecast the economy and communications strategy the Fed uses to convey its policy outlook to markets and the public.

In all these areas, Warsh could come up against institutional resistance from Fed staff or Fed governors and presidents, and from markets that are accustomed to how the Fed does business and generally averse to change. Even getting to the chair’s seat will be a challenge for Warsh, whose hearings have been delayed by Sen. Thom Tillis‘ discontent about a criminal investigation into Fed Chair Powell. Tillis, R-N.C., says he will hold up a Senate vote on Warsh unless the Justice Department drops that probe.

Underpinning Warsh’s agenda is his deep-seated belief that the Fed has made a series of long-running policy errors. From maintaining too large a balance sheet after the emergency of the 2008 financial crisis to missing the inflation from the pandemic, Warsh believes the mistakes made by the Fed are rooted in the institution’s very fiber.

Merely installing a new Fed chair — even if it’s him — isn’t enough for Warsh.

“What the Fed needs is more robust discussion of ideas, less groupthink. I don’t like it that everyone’s following the same models,” Warsh told CNBC last year.

Warsh, in keeping with practice for federal nominees, declined to comment.

For Warsh, one thing matters most: “Fed credibility is everything.” 

Through it all, the 55-year-old former…