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 hi-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, 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%.
Let’s consider the impact of artificial intelligence on this economy. There are some scary stories out there about the likely impact of Claude and ChatGPT on the labor force. But so far, the vaunted productivity boom is not in the data. In fact, there is little evidence that AI is diffusing rapidly across businesses, which would be necessary for it to boost their productivity.
What we can see clearly is massive investment in datacenters to develop AI models, which is turbocharging demand for all sorts of stuff, raising prices of everything from electricity to memory chips and fuelling a stock market boom that is underpinning consumer demand.
The productivity boom may eventually happen. Of course, that will allow businesses to do more with less. But even then, it is by no means obvious that this will bring about lower interest rates. It might even call for them to be higher, as faster growth encourages investment, stoking demand for capital.
Warsh may remember the endgame in Greenspan’s 1990s playbook. The Fed started raising interest rates as inflation picked up in 1999 and 2000, and policymakers started worrying about how the dotcom bubble was supercharging the economy.
Perhaps there is a path for Trump to get the Fed he wants. He has assets on the board. Like Stephen Miran, his former chief economic adviser, who co-authored a paper about Fed reform that proposes making it “significantly more accountable to the president”, in part by ensuring that board members and reserve bank leaders are “subject to at-will removal” by Trump. Two more of the seven board members are Trump appointees. If Warsh makes it through, Trump would keep three allies on the board.
But getting to seven votes looks like a long shot. The courts seem unwilling to let Trump fire governor Lisa Cook for no legitimate reason. And the president lost an opportunity to corral the Fed last December when the board reappointed all the regional Fed bank presidents – who provide five votes on the open markets committee – even as the treasury secretary, Scott Bessent, was scheming about how to overthrow them.
Trump’s dream of a Fed that cuts rates when he says so remains out of reach. The American economy can still sleep at night.
