Warsh 'regime change' faces steep hurdles at a sprawling US central bank

WASHINGTON, Jan 31 (Reuters) - Kevin Warsh checks a long list of boxes for President Donald Trump as his pick to run the Federal Reserve, with longstanding political and social ties to the president, deep Wall Street connections and a well-tailored demeanor, but how deeply and quickly he will cut interest rates and how aggressively ​he will pursue his "regime change" at the Fed remain open questions.

Trump has called for rate cuts to what amount to crisis levels of perhaps 1%. That's an aim Warsh, ‌an inflation hawk in his prior term as a Fed governor from 2006 to 2011, may find too aggressive, and which economic data and the views of his 18 policymaking colleagues may make impossible. Rate futures remained priced for just ‌two quarter-point rate cuts in 2026 from the current 3.50% to 3.75% range, and did not move appreciably after Trump announced the nomination in a social media post.

Likewise, Warsh's years of Fed criticism, begun after he left the board in 2011 and intensified over the past year as Trump considered him to succeed current Chair Jerome Powell, now meet the challenge of how to turn think-tank speeches and newspaper op-eds into reform that can get through the Fed's Board of Governors, get sign-off from Trump and Treasury Secretary Scott Bessent, and clear the U.S. Congress if it involves amending the Federal Reserve Act.

Change, in ⁠other words, may be easier said than done.

Warsh "is a pragmatist who won't ‌want to lose market trust by making cuts that aren't warranted. His long history of concern about inflation suggests that he won't allow the economy to overheat," said Heather Long, chief economist for Navy Federal Credit Union. "He's been an outspoken critic of the Fed's balance sheet and groupthink. More clarity is ‍needed on how far he intends to go" in pursuing other changes at the Fed.

It also may take more than just "breaking some heads" at the Fed, as Warsh put it in a July interview on Fox News, speaking of the people who are about to become his colleagues.

THWARTING 'INSTITUTIONAL DRIFT'

The Fed particularly in the last 20 years has become a complex, hybrid beast that grew with an expansion of power during the financial crisis ​and through the pandemic. That may be just what Warsh and Treasury's Bessent, in recent writing, have in mind in their criticisms.

The Fed's mix of monetary policy powers, considered its sole province, ‌along with the sort of regulatory authority that is usually situated in the executive branch, and controlling legislation set by Congress, has left even Supreme Court justices puzzled about exactly where the Fed fits in the federal system. It's a nerdy legal issue with deep ramifications. The question came up as the court considered whether Trump could fire Governor Lisa Cook, a question that becomes more tangled the more distant the Fed is seen as being from the U.S. administration.