Paul Volcker was probably the greatest Federal Reserve chair ever. But when he got the job in 1979, it came as a surprise to him.
As head of the New York Fed, he was summoned to an interview with President Jimmy Carter. Volcker informed the president that he believed in curbing inflation and preserving the Fed’s independence, according to Alan Blinder’s book “A Monetary and Fiscal History of the United States, 1961-2021.” Afterward, he told friends, “I just blew a chance of becoming Fed chair.”
But Carter appointed him anyway, knowing that Volcker had the right goals and that they could doom Carter’s reelection campaign — which they did. Volcker went down in history as the man who conquered inflation, laying the foundation for decades of American prosperity.
Kevin Warsh clearly did not blow his chance to become Fed chair by telling Donald Trump anything he didn’t want to hear. “He certainly wants to cut rates,” Trump said, which also happens to be Trump’s strong preference. Assuming Warsh can win Senate confirmation, the second most important office in Washington will be his.
Why he wants it, though, is a mystery. The nomination brings to mind what Abraham Lincoln said about the presidency: “I feel like the man who was tarred and feathered and ridden out of town on a rail. To the man who asked him how he liked it, he said: ‘If it wasn’t for the honor of the thing, I’d rather walk.’”
Once at the helm, Warsh will have two options, neither of them appealing. The first is to carry out Trump’s wishes by rushing to slash rates — in which case he would be forever branded as the compliant servant who took the Fed’s legacy of independence and lit it on fire.
The second is to resist the president’s demands — in which case Warsh would be ceaselessly vilified by Trump and his followers for the next three years, if not longer, at a cost that could be ruinous.
But Warsh clearly did want the job, to the point of overcoming his inflation-fighting instincts and echoing Trump’s call for the Fed to cut interest rates more than it already has. Or maybe his inflation-fighting instincts never really existed.
During and after the Great Recession of 2008-09, Warsh questioned the Fed’s loosening of monetary policy, fearing it would cause a surge in inflation. The Fed loosened anyway — a rational response to the severe downturn — and inflation remained low for years to come.
In 2015, with inflation hovering near zero, he called for tighter money, which might have caused harmful deflation if the Fed had taken his advice. Yet today, with price increases exceeding the Fed’s target, Warsh argues that interest rates must come down.
What changed? Oh, right — the party in control of the White House. Under Barack Obama, Warsh rejected measures to stimulate growth. Under Trump, he supports them. No need to overthink this.
Even if Warsh wants to cater to Trump, though, he may not succeed. The chair is only one of the 12 members of the committee that sets interest rates, and it just voted to leave them unchanged. In pushing for cuts, he could be outvoted, rendering himself the functional equivalent of a potted plant.
Or he could strong-arm a majority to go along. In that case, inflation would be likely to creep upward, subjecting Americans to a painful relapse of what they suffered in 2021 and 2022.
Jerome Powell, the Fed’s current chair, made a choice to avert a catastrophic economic crash during the COVID-19 pandemic, accepting the risk of a bout of inflation. Warsh would be doing it for a far less noble reason: to appease a president bent on advancing his interests in an election year.
Inflation is not the only peril such deference would invite, or even the worst. Making the Fed the servant of the White House would hobble one of the few institutions capable of limiting the overreach of a power-mad president. It would compromise the health of our democracy as well as our economy.
But Warsh has to know that if he chooses to focus on taming inflation, he will incur the fearsome wrath of his patron. Trump appointed Powell but has repeatedly denounced him as a “jerk,” a “bonehead” and an enemy of America.
Worse yet, his Justice Department launched a criminal investigation of the Fed chair. “He’s either corrupt or incompetent,” Trump insisted. If Warsh were to defy him, Trump would use every possible weapon to make him pay.
But defying Trump and preserving the central bank’s independence is the only responsible course. A 19th century Protestant hymn declares, “Once to every man and nation, comes the moment to decide, in the strife of truth with falsehood, for the good or evil side.”
For Warsh, that moment is coming.
Steve Chapman was a member of the Tribune Editorial Board from 1981 to 2021. His columns, exclusive to the Tribune, now appear the first week of every month. He can be reached at stephenjchapman@icloud.com.
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