The difficult dilemma facing the new Fed Chairman.

VTV.vn - With Kevin Warsh, an ambitious reformer, becoming Chairman, the Fed will enter a new phase, which is expected to impact the US economy and global interest rate policy.

Unforeseen challenges for the new Fed Chairman.

The new Chairman of the Federal Reserve (Fed), Kevin Warsh, 56, recently had a very special inauguration ceremony, as it did not take place at the Central Bank Headquarters like previous Fed chairmen, but at the White House. This is only the second time a swearing-in ceremony has been held at the White House – since the inauguration of former Fed Chairman Alan Greenspan in 1987. All other Fed chairmen have held their inauguration ceremonies at the Central Bank headquarters – a symbol affirming the institution's independence from the executive branch.

Kevin Warsh has clear advantages over his predecessor Jerome Powell. First, a personal relationship with President Donald Trump. Second, the support of Treasury Secretary Scott Bessent. But he takes on the position under extremely difficult circumstances.

The biggest challenges were inflation and war. Mr. Warsh took over the leadership of the U.S. central bank when the economy was reeling from tensions in the Middle East. The oil shock had driven up gasoline prices, mortgage interest rates had soared to a nine-month high, consumer confidence had fallen to a historic low, and overall inflation had jumped to 3.8%—the highest in three years.

Secondly, the Fed currently holds a massive amount of assets and liabilities totaling $6.7 trillion. This is a consequence of the bank's massive money-pumping over the past years to rescue various crises... And Warsh argues that these quantitative easing measures threaten the Fed's independence.

Third, President Trump chose Warsh to lower interest rates. But the US war in Iran is driving up oil prices, fueling inflation, which could make it the case that Warsh will be forced to raise interest rates.

In addition, the AI ​​boom has profoundly reshaped the economy. But the AI ​​craze has fueled massive investment, causing the US economy to overheat more than expected and inflation to rise again.

Ben McMillan, Investment Director at IDX Advisors, said: "Long-term bond yields are rising. The cost of capital is becoming more expensive, coupled with the fact that transportation costs are already higher due to rising oil prices. All of this represents a real 'tax' on the economy."

Stephen Kates, a financial analyst at Bankrate, shared: "The base scenario is that we could still maintain high inflation at around 3% until the end of the year... The current inflation situation suggests there will be no interest rate cuts until the end of this year."

The new Chairman of the US Federal Reserve (Fed), Kevin Warsh, 56, just had a very special inauguration ceremony.

The successor to former President Alan Greenspan

During his inauguration, Kevin Warsh cited former chairman Alan Greenspan as a role model. Why did Kevin Warsh choose to follow Alan Greenspan's path instead of Ben Bernanke, with whom Warsh worked for many years?

Associate Professor Ho Dac Nguyen Nga from San Francisco State University, USA, explains: "Bernanke is an academic economist who studies the Great Depression and fears deflation. Therefore, every time there is an economic crisis like in 2008, Bernanke tends to use loose monetary policy to stimulate consumption and save the economy. Kevin Warsh, on the other hand, is a market-savvy individual with a more realistic and pragmatic perspective. During his time working with Bernanke in the 2008 economic crisis, Warsh realized that prolonged loose monetary policy creates asset bubbles, unevenly distributes capital in society, creates market distortions, and undermines the Fed's credibility in inflation."

From then on, Kevin Warsh held a more hawkish view on monetary policy than Bernanke. He also greatly admired Greenspan for his ability to observe market signals, technological structures, and the impact of technology on labor productivity and its resulting economic effects. For example, Greenspan believed that the internet increased labor productivity, and that keeping interest rates low prevented inflation. Now, Kevin Warsh also believes that AI will increase labor productivity, and we can keep interest rates low without creating excessive inflation.

The ambitious reform program of the new Fed chairman.

In his inaugural address, Kevin Warsh stated that he could curb inflation and lower interest rates simultaneously – a goal his predecessor Powell failed to achieve during his eight years in office. That is a truly ambitious goal.

Regarding interest rates and inflation forecasting models, Warsh rejected the Fed's long-standing theory—the Phillips curve—which posits that high employment leads to inflation through wage pressure. He argued that inflation stems from excessive government spending, not from rising incomes. He also expressed disbelief in the Fed's current inflation measurement methods and proposed developing a real-time inflation measure based on millions of price transactions across the economy.

Regarding the Fed's massive assets and liabilities, currently at $6.7 trillion, Warsh wants to significantly reduce their size, arguing that the Fed's accumulation of assets through quantitative easing programs has inadvertently subsidized government borrowing and drawn the Fed into markets outside the central bank's mandate.

Visually, Warsh wants the Fed to say less – especially about its short-term interest rate trajectory. He criticizes the "dot plot" – the chart showing interest rate forecasts by individual Fed officials – and even expresses skepticism about holding press conferences after each meeting, a practice established by Powell. His argument is: "If you're not good at forecasting, you should do less."

The Fed is entering a new phase, which is expected to impact the US economy and global interest rate policy.

The Fed enters a period of reform.

With Kevin Warsh, an ambitious reformer, becoming Chairman, the Fed will enter a new phase, impacting the US economy and global interest rate policy.

Associate Professor Ho Dac Nguyen Nga from San Francisco State University, USA, commented: "Under Kevin Warsh, the Fed will return to its basic tasks, which are price stability and employment, and will abandon its role as the market's guarantor, pumping money in whenever the market needs it. Thus, although Kevin Warsh is likely to cut short-term interest rates, long-term interest rates are likely to remain high for a long time. This makes US government bonds more attractive, and capital flows will move away from high-risk, highly leveraged assets and back to assets with physical value. Maintaining high interest rates for a long time also puts pressure on the central banks of other countries, making it more difficult for them to cut interest rates for fear of capital fleeing those countries and flowing into the US market."

Another point is that Kevin Warsh shares a similar view with President Trump regarding the use of the US dollar, like American financial institutions, as a weapon in geopolitical competition with other countries.

Kevin Warsh's first policy meeting in June will be the first test of the independence of the Fed under his leadership, amid President Trump's desire to cut interest rates despite a very hot economy. Financial markets now believe the Fed is more likely to keep interest rates unchanged in June and July, or even raise them, than to cut them this year.

Source: https://vtv.vn/bai-toan-kho-cua-tan-chu-tich-fed-100260526113403944.htm