The US Federal Reserve (Fed) will have the green light for a new leadership starting tomorrow, Wednesday, April 29. The fact that Republican Senator Thom Tillis called a vote late last night to approve Kevin Warsh as Fed chief on Wednesday is not just a technical step. There is also an absurd episode, where Jerome Powell, presented as one of the most honest people in the financial system, was accused by Donald Trump, perhaps the most controversial president in American history, simply because he refused to lower interest rates.
There is also a political consequence, with three winners and one loser. The winners are Powell, Tillis, and the Federal Reserve itself, handed over with its reputation intact to Warsh, who must now preserve it. The loser is President Trump.
Yesterday’s and Sunday’s news of the Justice Department’s withdrawal from the case against Powell is all the more shocking because just a few days ago, President Trump had resumed his harsh attacks on the Fed chief, challenging a judge who had described the White House’s accusations against Powell as “political.” This was compounded by the very strong stance of North Carolina Senator Tillis. He had warned Trump that he would not call a vote on Warsh in his banking committee until the proceedings against Powell were concluded.
Tillis is one of the few Republican senators to have stood up to Trump. And in this case, his persistence won. The accusations against Powell and against the Fed’s autonomy were so harsh that they created a political vacuum around Trump.
Other Republican senators joined Tillis in supporting his line in favor of Powell and the independence of the Fed, reinvigorating a Congress increasingly weakened by Trump’s strong personality, but also by his threats not to support this or that candidate if they did not fit his political line. Tillis had also announced that he would retire next January, at the end of his term, and was therefore not blackmailable by the White House. In the end, when Trump realized that he risked being left without a Fed chairman on May 15, when Powell’s term ends, he decided to retire. It was then that Janine Pirro, the special prosecutor in Washington, officially announced the closure of the case. She added that she would keep her eyes and ears open if other suspicions about Powell emerged. But for Tillis, who had spoken to Pirro to ascertain her intentions, the game was over: he declared that he was satisfied and that he would vote for Warsh himself.
There remains a question mark over what Jerome Powell will do. If his term as Fed chairman ends on May 15, he will remain on the board until 2028 and could remain at the Fed for another two years, serving as a constant opponent for Trump. The other alternative, certainly attractive after two tiring terms at the helm of the central bank, is a move into the private sector.
Another question arises over what Warsh will do about interest rates, now that inflation is rising again due to the blockade of the Strait of Hormuz and the war in Iran. The first meeting of the Monetary Policy Committee (FOMC) on rates will be in June, and at that time Warsh will play a key role for his credibility: will he cut rates as Trump has promised? Or will he judge, relying on his institutional autonomy, that it is better to wait?
We know his thesis. The level of rates must take into account the impact of artificial intelligence on the economy and on employment. And the fact that Meta a few days ago announced the dismissal of 10,000 employees goes in this direction. But if he makes the wrong choice, he will lose the trust of the markets, the most precious asset for any central banker anywhere in the world.