Why Trump’s pick for Fed chair will not bring home the bank for the president

Donald Trump’s fate is to be frustrated by monetary policy.

Even assuming he gets his way and Kevin Warsh succeeds Jerome Powell as chair of the Federal Reserve next month, it is unlikely that the president will finally gain control of the Fed.

Trump has called Warsh a “central casting” choice for the Fed. And he certainly looks like Trump’s man. His monetary thinking seems blatantly partisan. In his previous stint as a Fed governor, Warsh exhibited serious hawkish instincts – worrying about inflation even as the economy struggled out of the g recession under Barack Obama. Now, he has sided with Trump and, despite persistently high inflation, is calling for lower rates today. He has even cobbled together a high-tech conceptual framework to justify lower borrowing costs.

Still, he will have a hard time convincing a majority of the 11 other members of the Federal open markets committee, most of whom are not in Trump’s pocket, that cutting rates now is the right thing to do.

Warsh’s argument is not irretrievably insane. It closely resembles the reasoning of a fabled former Fed chairman, Alan Greenspan, who successfully argued that the information technology boom of the late 1990s justified not raising interest rates despite low and declining unemployment.

Greenspan believed that the productivity boost delivered by computers gave the economy more room to maneuver. Businesses could produce the same stuff with fewer workers, or offer higher wages without raising prices. Today, Warsh is arguing that the AI revolution will do the same – allowing the Fed to reduce borrowing costs without pushing inflation higher. As he told Fox last year, the Fed must “allow that productivity and that technology to continue to lower prices, instead of saying, ‘Oh my gosh, the economy’s too strong. We better stop this.’”

Even assuming Greenspan’s argument was correct in the 1990s – a much-debated point – Warsh’s contentions are weak. Neither is Trump’s erratic policymaking helping Warsh’s case. In the late 1990s, deepening globalization kept prices in check while immigration alleviated tightness in the labor market. The Clinton administration’s tight fiscal policy produced the first budget surplus since the 1960s and trimmed the federal debt to 54% of GDP.

Today, Trump’s wall of tariffs is closing off the US market, raising costs for businesses and consumers, while his aggressive deportation policy is shrinking the labor supply. Meanwhile, a budget deficit of 6% of GDP has pushed the debt to more than twice its level, as a share of the economy, as when Clinton left office. It’s not a coincidence that in the late 1990s inflation fell below 2% while last month it jumped above 3%.