How Kevin Warsh will navigate his tricky new position as Fed chairman under Trump

If Federal Reserve Chairman Kevin Warsh can’t cut interest rates, how will he appease President Trump, who gave him his new job to sharpen his ax and do precisely that?Try changing the subject.That’s the word from Fed watchers – including those who know Warsh well – who have been mapping out what they believe he will do after officially taking over as head of the nation’s central bank on Friday. Warsh’s predicament will be on full display on Friday at the White House, as Trump, who famously replaced Jerome Powell over the latter’s refusal to slash rates, will be presiding over Warsh’s swearing in as chairman. Trump, of course, is seeking to make the appointment of his new Fed chair a spectacle; most Fed chair swearing-in ceremonies are hardly ceremonies, usually done behind closed doors at the central bank without much fanfare. It’s going down in the backdrop of high-stake political gamesmanship that has engulfed the Fed for the better part of the year with the president warring with Powell who defied him on rate cuts, then unleashing his DOJ to investigate statements Powell made before Congress over the cost of the agency’s new HQ. Powell himself is breaking with tradition, choosing to stay on as a Fed governor, and likely looking to thwart Trump from pressuring the agency even with Warsh in charge.On top of that, the conflict with Iran has led to a spike in oil prices and an inflation surge, albeit one that’s possibly temporary, but it too makes Warsh’s desire to appease Trump and cut short term rates more difficult.Indeed, traders are currently betting that a rate increase this year is more likely than a cut, even with Warsh in charge.I have my doubts, and so do people who know Warsh, about Warsh allowing a rate hike.

First, he thinks the short-term Fed Funds rate that the central bank directly controls isn’t the main driver of long-term inflation – it’s all the liquidity sloshing around in the economy when the Powell Fed contin...