Nouriel Roubini: Kevin Warsh’s ideas may not survive contact with reality once he takes charge of the Fed

Now that Kevin Warsh has been nominated as the next chair of the US Federal Reserve Board, it is worth asking how different a Warsh Fed would be from the current one. President Donald Trump had made it clear that he wants a Fed chair who will push for lower policy rates to juice the US economy and support his broader agenda.

But Warsh has a history of monetary hawkishness, voicing concerns about the risk of excessive inflation even during the depths of the post-2008 deflationary cycle. Moreover, he is a mainstream globalist who favours free trade and immigration, not a protectionist-nativist MAGA ideologue.So, why did Trump choose him? Aside from the need to calm markets spooked by his attacks on Fed independence, one reason may be that Warsh believes that AI and other technological innovations will reduce inflation and thus allow for lower policy rates.

But there is a problem here: If AI reduces inflation, it would do so through higher GDP and productivity growth, implying the need for a higher equilibrium inflation-adjusted policy rate and real long-term rate, even if lower inflation implies a potentially lower nominal policy rate. On net, then, AI would not necessarily justify a lower neutral federal funds rate.

If Warsh and Trump’s other ally on the Fed board, Stephen Miran, think otherwise, they may be in for a nasty surprise.A second possible reason is that Warsh has voiced support for credit-easing policies. But there could be a problem here, too.

With Trump-appointee Michelle Bowman now in charge of bank supervision, a Warsh Fed will probably accelerate efforts to ease credit conditions even at the risk of fuelling credit and asset bubbles. And that, in turn, could undermine financial stability at a time when