What will Kevin Warsh change at the head of the Fed and why is it important for the whole world? Analysis

The main thing in the material:

— Kevin Warsh took over the Fed at a time when the American economy is facing the consequences of a prolonged period of high interest rates, and inflation remains above the 2% target.

— The new head of the Federal Reserve has been considered a proponent of tight monetary policy for many years, but in recent months he has begun to admit the need to lower rates. At the same time, analysts do not expect a rapid easing of the exchange rate.

— The Fed's decisions have a direct impact on the global economy: high interest rates strengthen the dollar, increase pressure on commodity markets and slow global growth, and for Russia they create risks of weakening the ruble, reducing export revenues and maintaining expensive loans within the country.

The American financial system is facing a global restructuring. Kevin Warsh, a former member of the board of governors of the central bank, who for many years was considered a proponent of tight monetary policy, became the new chairman of the Federal Reserve System. It is now up to him to make decisions in an environment where the American economy is struggling to withstand high interest rates, while inflation has not returned to its target level. Warsh intends to change the very model of the regulator's work — his arrival at the Fed may mark the end of the era of unconditional market support from the American central bank. Izvestia investigated how this would affect the global economy and Russia.

A compromise for Warsh

In mid-May, the Senate confirmed 56-year-old Kevin Warsh as chairman of the Federal Reserve System. His candidacy was supported by 54 legislators, 45 voted against. Analysts note that such a small preponderance of votes reflects the growing disagreements within the American political establishment over the future course of the Fed.

Warsh joined the central bank at a time when the pressure on the regulator increased dramatically. President Donald Trump has been demanding lower interest rates for more than a year, accusing the Fed of slowing the economy and increasing budget spending on servicing the national debt. The previous head of the regulator, Jerome Powell, fearing a new wave of inflation, refused to comply with these requirements, and provoked sharp criticism from the head of the White House.

Now the markets are trying to assess how independent the new Fed chairman will be. Warsh himself publicly declares that the central bank must maintain its autonomy. However, analysts are paying attention: after Trump made it clear that he wanted to see a proponent of a softer monetary policy at the head of the Fed, Warsh's position on rates began to change.

Previously, he was one of the most ardent adherents of the rigid PREP. During the 2008 financial crisis, Warsh, as a member of the Fed's board of governors, warned about the risks of inflation and advocated higher interest rates amid a deep economic downturn. In 2024, he also criticized the central bank for cutting the rate too sharply. Analysts said that Warsh's tough stance could reduce his chances of becoming Trump's nominee to head the Fed. But then Warsh's rhetoric softened — he began to admit the need to reduce the cost of borrowing. So, probably, the new head of the Fed will try to keep the president's favor, even though he publicly declares that he will not be his puppet.

"Printing press" mode

Warsh believes that the US central bank has gone too far in trying to support the economy through cheap money and large-scale injections of liquidity. After the 2008 crisis, the Fed switched to almost constant stimulus mode. For a long time, the regulator kept rates near zero and bought government and mortgage securities worth trillions of dollars. The volume of assets on the balance sheet of the Federal Reserve System has grown from $900 billion in 2008 to almost $9 trillion in 2022. Now it is about $7 trillion.

According to Warsh, central banks should only be active during crises. From his point of view, the Fed's constant intervention distorted market pricing — the value of assets began to depend primarily on the amount of liquidity coming from the central bank.

If the regulator really accelerates the reduction of the balance sheet, the market will have to absorb a larger amount of US government debt without the previous support from the Fed. In the context of a large budget deficit (in the current fiscal year, it is projected to amount to about $1.9 trillion) This may increase pressure on the bond market and lead to a further increase in yields on long-term securities. And high yields mean higher prices for mortgage loans and corporate borrowing. Fast-growing companies, whose business model has long relied on the availability of cheap capital, are particularly vulnerable in this situation.

Against this background, investors increasingly fear that the era of constant support for markets from the Fed is coming to an end. That is why Wall Street sees the arrival of Warsh not as an ordinary change of the head of the regulator, but as an attempt to change the entire model of American monetary policy.

Warsh also criticizes the Fed's overly active communication strategy. In his opinion, officials' constant forecasts of future decisions make the market too dependent on the signals of the central bank. As a result, investors are starting to focus not so much on economic indicators as on expectations of further actions by the regulator.

Inflation remains the main problem.

Consumer inflation in the United States now stands at 3.8%, the highest level in the last three years, as prices for food, energy, and airline tickets rise. At the same time, the Fed's inflation target remains at around 2%. As the market is increasingly skeptical about the regulator's ability to quickly return price growth to this goal, the yield on ten-year US bonds exceeded 4.5%.

Warsh himself believes that the current inflationary crisis is largely the result of the Fed's own mistakes. In his opinion, after the pandemic, the Federal Reserve considered the acceleration of inflation to be a temporary phenomenon for too long and began to tighten monetary policy too late, which eventually contributed to a jump in consumer inflation above 9% in 2022. As a result, the general confidence in the central bank was undermined.

Speaking to the Senate Banking Committee, Warsh said that while Americans are discussing rising prices at kitchen tables, inflation remains a problem. And it will be solved only when no one talks about it. But the situation is complicated by the fact that the regulator has to deal with inflation in conditions of a huge debt burden — the US national debt has already approached $39 trillion. With high interest rates, the budget is forced to spend more and more money on debt servicing, which increases pressure on the financial system and limits the room for maneuver of the regulator. As a result, the Fed is trapped: a rapid rate cut could reignite inflation, and maintaining a tight policy could increase pressure on the economy and the financial system. That is why a number of economists say that the new head of the Fed found himself in an almost hopeless situation.

Warsh, apparently, wants to change the very mechanism of combating inflation: lowering the rate at the same time as reducing the Fed's balance sheet and reducing its role in supporting markets. However, such a strategy can be risky: investors are too accustomed to perceiving a rate cut as a signal for the return of cheap liquidity. As a result, inflationary pressures may increase.

Against this background, analysts do not expect a rapid easing of the Fed's policy. Economists surveyed by Bloomberg predict only two rate cuts by the end of the year, each by 0.25 percentage points. J.P. Morgan considers the base scenario to keep the rate at the current level until the end of 2026 and admits that the Fed's next step may be a new increase in 2027. In recent months, financial markets as a whole have switched from expectations of a rate cut to discussing the risk of further growth.

Against this background, it will not be easy for Warsh to move quickly to lower the rate. To change course, the new head of the regulator will need the support of other members of the Federal Committee on Open Market Operations, where he has only one vote. The next meeting of the committee will be held on June 16-17.

Why the Fed rate is important not only for the USA

The decisions of the Federal Reserve System have long ceased to be an exclusively domestic American issue. The Fed's rate determines the value of the dollar, the world's main reserve currency. A significant portion of global trade, international settlements, and debt transactions are conducted in dollars. Therefore, any change in the US monetary policy affects not only the US economy, but also the movement of capital around the world.

When the Fed raises the rate, the yield on U.S. bonds and other dollar—denominated instruments increases, as investors begin to invest more in such assets. Demand for the US currency is growing, and the dollar is strengthening. It is becoming more difficult for other countries to attract money, maintain their own currencies and economic growth. Since oil, metals and other raw materials are traded in dollars, it is more expensive for other countries to buy them — demand for raw materials is decreasing, global economic activity is slowing down. Therefore, the US central bank's rate is often referred to as the main benchmark for global financial conditions.

However, it's not just the rate issue that's worrying investors right now. If the Fed really reduces the volume of liquidity injections into the financial system, then even with a rate cut, the world will not receive the same amount of cheap dollars. The global economy will have to adapt to the gradual restructuring of the current financial model.

This is especially important for Russia. The Russian economy remains dependent on export earnings and global commodity prices. Therefore, changes in the Fed's policy indirectly affect the Russian budget and the ruble exchange rate. As the dollar strengthens, Russia may face a reduction in export earnings, additional pressure on the ruble, and increased inflationary risks. The Bank of Russia will have to keep the interest rate high for longer, which means expensive loans, weak investment activity and a slowdown in economic growth. At the same time, the current spike in oil prices due to the conflict in the Middle East may partially mitigate the negative effect. However, in the long term, the Fed's harsh policy and the reduction of global dollar liquidity still remain a risk for Russia.