Kevin Warsh will take the helm of the Federal Reserve amid substantial doubts about his independence, plans to reduce the balance sheet and ability to cut interest rates, according to the the latest CNBC Fed Survey.
Just 50% of respondents believe Warsh will conduct monetary policy mostly or very independently, compared with 46% who say he will be only somewhat or not at all independent.
It’s a high level of concern, though confidence in his independence is 13-point higher than last month. That suggests Warsh might have convinced a few observers in his Senate confirmation last week.
“My hope and expectation is that Warsh will preserve an independent position as chair,” economist Hugh Johnson said. “More hope than expectation, but we will see.”
The survey of 26 economists, strategists and analysts was conducted Thursday and Friday last week, after Warsh’s nomination hearing Wednesday.
Warsh said clearly in his hearing that he would maintain Fed independence when it comes to monetary policy. But he added he was “committed to working with the administration and Congress on non-monetary matters that are part of the Fed’s remit.”
Warsh’s confirmation cleared a key hurdle last week when U.S. Attorney Jeanine Pirro of Washington, D.C., referred an investigation into the renovation at Fed headquarters over to the central bank’s inspector general, seemingly ending a criminal probe. A Senate Banking Committee vote is scheduled Wednesday.
Working with Treasury
In the past, Warsh has spoken about a Treasury/Fed accord regarding the size and composition of the balance sheet.
“One of the early indicators of a real threat to that independence would be the degree to which Warsh and Bessent look to remake the Treasury-Fed Accord from 1951 that separates debt management from monetary policy,” said John Donaldson, director of fixed income at Haverford Trust.
Donaldson added he thought it would be unlikely for Warsh would break that accord.
On rates, 58% say Warsh will be dovish, or in favor of cutting, up 14 points from March, and 65% say he will be hawkish on the balance sheet, up 9 points, meaning he would be inclined to cut the Fed’s bond holdings.
Among those who believe Warsh will reduce the Fed’s $6.7 trillion balance sheet, the average decline in the first year is expected to be about $800 billion. But there’s disagreement about whether he can even reduce it, with 46% saying it won’t happen in the first year, compared to 41% who say he will.
Both Warsh and Treasury Secretary Scott Bessent have called for the balance sheet to be reduced over time.
But there’s a debate about what impact it would have: 46% say cutting the balance sheet will hurt efforts to keep interest rates low and 38% believe it’s a negative for economic growth. A third of respondents believe it’s bad for the stock market compared with 38% who say it will have no effect and 13% who see it as positive.
One of the biggest areas of disagreement is how the Fed should treat productivity from artificial intelligence.
Warsh has said the Fed shouldn’t wait until it shows up in the data and that poliycmakers need to “make a bet” on the impact ahead of time.
Respondents disagree, with 81% saying the Fed should not incorporate AI productivity into policy until it actually shows up in the data.
“Even if there is potential for AI in the long run to reduce inflation it would be hard to argue for Fed easing in the short term,” said economist Jack Kleinhenz, senior economic advisor at the National Retail Federation. “We are looking at higher inflation in the near term.”
