San Francisco Frontiers - Warsh set to take over a divided Fed facing Trump assaults

The Senate will vote at 2:00 pm local time (1800 GMT), with Trump's Republicans holding a slim majority and expected to confirm his nominee to replace Jerome Powell.

Once known as a monetary "hawk," Warsh has since changed his tune in line with Trump's abrasive push for lower interest rates.

The incoming Federal Reserve chair has promised to bring "regime change" at the central bank, which he has criticized for being too political and communicating too openly on its decision-making processes.

But with inflation still above the Fed's long-term two-percent target -- and rising over Trump's Iran war -- Warsh is unlikely to convince fellow Fed rate-setting committee members to cut immediately.

That could lay him open to attacks from Trump, who has relentlessly lashed out at Powell over rate decisions.

"Warsh's biggest challenge will likely be dealing with President Trump," said David Wessel, senior fellow at the Brookings Institution.

"The president does not respect the independence of the Fed and he wants interest rates to be lower."

- Fed independence attacks -

Trump's campaign of insults against Powell has been viewed by many as part of an unprecedented assault on the central bank's independence.

In January, Powell said a Justice Department criminal probe against him over cost overruns related to a building renovation project was intended to create pressure on monetary policy decision making.

That followed Trump's separate attempt to oust Fed Governor Lisa Cook from the board.

The criminal probe against Powell has since been dropped, as the Trump administration aimed to smooth the path for Warsh's nomination. The Supreme Court is due to rule on the legality of removing Cook.

Both moves were "unprecedented," said Kathryn Judge, a Columbia law professor who focuses on banking.

While Warsh is Trump's pick -- as Powell was nine years ago -- Judge said there was no reason to believe the pressure will ease.

"Fed officials have been put on notice that this president is willing to use all available tools to bully them into acceding to his demands," she said.

- Economic challenges -

Warsh is taking over as the world's largest economy continues to reel from repeated economic shocks.

The pandemic delivered a hammer blow to the Fed's inflation target, with CPI peaking at 9.1 percent in mid-2022. It has since come down, but US households have been battered by years of higher-than-expected price increases.

In April, year-on-year inflation came in at a three-year high of 3.8 percent, fueled in part by surging oil prices in the wake of the US-Israel war on Iran.

The Fed's other mandate is ensuring maximum employment. The unemployment rate has remained relatively firm at around 4.3 percent, but the steady number hides churn beneath the surface.

Job growth has been weak, see-sawing between expansion and contraction for months, with new jobs mainly driven by the health care sector.

The tumult has been partly hidden because there has been a significant drop in labor supply, driven by Trump's deportation drive and an ageing population.

The situation has put Fed policymakers in the difficult position of having to choose between dueling mandates: raise interest rates to combat inflation, or cut them to spur growth?

- A house divided -

It is here that Warsh faces his third major challenge: divisions on the Fed's rate-setting committee on the path forward.

At the last meeting, there was a rare outpouring of dissent, with three members declaring that the Fed should indicate a rate hike could be on the cards to combat inflation.

"One of Warsh's challenges is that the Fed does seem divided -- at times along partisan lines, which is a change from the past," said Wessel.

Added to that another wrinkle: Powell will be the first outgoing chair in more than 70 years not to leave the board at the expiration of his term as its head.

C.Lewis--SFF