Barry Eichengreen: If Kevin Warsh takes charge of the US Federal Reserve, can it preserve its independence?

Subscribe to enjoy similar stories. Now that US President Donald Trump has chosen Kevin Warsh as his appointee to succeed Jerome Powell as Federal Reserve chair, it is time to take Warsh’s ideas seriously, if not literally. Much of the discussion about Warsh has focused on his interest-rate recommendations, which have swung with the political wind.

But this is to make a mountain out of a molehill. The Fed’s interest-rate policy is decided by a committee, where the chair is only one voice among many. The chair’s voice is the loudest, but that is no guarantee.

G. William Miller was outvoted in 1979 when he opposed an increase in the Fed’s discount rate. Miller was outvoted by the Federal Reserve Board, not the Federal Open Market Committee (FOMC), since it is the Board that makes the final determination regarding the discount rate.

The highly regarded Fed Chair Paul Volcker was briefly outvoted in 1986 when he opposed an interest-rate reduction. Neither split tarnished the Fed’s reputation, although both episodes diminished the influence of the chair. Both Miller and Volcker exited their positions not long thereafter, which is a cautionary tale for Warsh.

The next chair will have to build a consensus to avoid becoming another Miller. This makes Warsh’s ideas about forecasting the course of the economy a matter of keen interest, because his ideas will be the vehicle for his influence on other Fed governors. At times Warsh seems to have advocated depending less on complicated economic models, career staff and incoming data, favouring a more discretionary approach resting on the tenor of markets.