A lot has changed since Kevin Warsh was nominated by President Trump to replace Jerome Powell as chairman of the Federal Reserve Board. Most notably that includes the war in Iran, the run-up in oil prices, and a bond market increasingly nervous about inflation as it attempts to digest massive supplies of new Treasury debt. Tariffs have also contributed to the updraft in measured inflation since then, which (in addition to oil prices) represents another impingement on the economy’s supply side.
Change and Change Itself
By the time Warsh was sworn in as chairman, expectations for Fed rate cuts had swung to expectations of a quarter-point increase in the federal funds rate target, if not at the mid-June meeting of the Federal Open Market Committee (FOMC) then in July. It’s not clear that Warsh is on board with that, and the status of the Iranian conflict, oil supplies, and the bond market could change dramatically before the June meeting.
Short-term inflation expectations have risen, so a rate hike by the Fed might seem reasonable if not for the possibility that current inflation is transitory (but I use that term guardedly). In terms of money growth, policy seems roughly neutral to slightly restrictive. M2 growth from a year earlier was 4.7% in April. Nominal (current dollar) GDP grew at a slightly faster 5.1% clip in the first quarter, and it might accelerate in Q2. Real GDP advanced 1.6% from a year ago in the first quarter, but the Atlanta Fed’s forecast for real GDP in Q2 is a stronger 3.2%. Meanwhile, core PCE inflation (the Fed’s preferred gauge) was 3.1% in the first quarter and 3.3% in April. If the numbers roughly follow the same track going forward, nominal GDP in Q2 could be up by about 6% – 6.5% from a year ago. Slowing the rate of M2 growth much from its recent pace might be an overreaction.
Moreover, it might be premature to raise the funds rate when a peaceful resolution to the Iran conflict is still possible. Again, we might know by the time the FOMC convenes in June. In that case, market rates could ease quickly. I am skeptical, however, that Iran will prove to be a reliable partner to any peace agreement. I’ll be surprised if the blockade on the Strait of Hormuz ends any time soon, and a few air strikes have already been renewed. Still, I expect the FOMC to defer any rate hike until at least the July meeting. In fact, I’ll be surprised to see one at all.
Sound Money or Monetary Madness
Many describe Warsh as a “sound money” guy, having been greatly influenced by Milton Friedman. He’s been critical of quantitative easing (QE): the Fed’s purchases of securities for its own balance sheet to provide liquidity to the markets and banking system. If the hostilities continue in Iran, Warsh is more likely to favor quantitative tightening (QT) in the short-term than rate hikes. QT would involve reductions holdings of securities on the Fed’s balance sheet, which Warsh has long advocated.
On the other hand, Warsh has been undaunted in insisting that the AI revolution will be a dramatic deflationary force. That’s a longer-term proposition, but it reinforces his preference for lower rates. So Warsh is for “sound money” and would like to see QT, but he also prefers lower rates and apparently believes that AI might justify a more expansionary monetary posture. So where does that leave us?
Squaring the Circle
A few months ago I described a coherent policy agenda for the Fed under Kevin Warsh, given his policy preferences. It might have lacked realism in terms of Fed politics, but it was motivated by the question of whether lower rates are compatible with QT. The discussion did not anticipate the Iran conflict and its economic and financial consequences.
Lower rates and QT would be compatible if the Fed enables and incentivizes commercial banks to hold more securities and lend more aggressively. This would require regulatory changes as well as reductions in interest on bank reserves (IOR) held at the Fed.
Judy Shelton in the Wall Street Journal has made the same point, characterizing such a policy shift as “pro-market”. That’s because it would allow banks to invest in relatively safe assets, would eliminate a subsidy masquerading as a price (IOR – though fully administered), and would mean a transition from the Fed’s emphasis on maintaining ample bank reserves to scarce bank reserves. The latter would restore activity in the market for overnight loans of reserves (federal funds), which would then trade at a price corresponding to their degree of scarcity. That would provide an important signal to other markets, not to mention the Fed itself. Today, that signal is distorted by the Fed’s provision of ample reserves (repo rates notwithstanding). Jai Kadia and Norbert Michel have madea similar argument, along with advocating for rules-based monetary policy, rather than frequently destabilizing discretionary actions.
Momentum
In April, David Beckworth noted that momentum is buildingin influential circles for this change, which he describes as a “demand driven” approach, as opposed to the “supply driven”, ample reserve operating procedure now in force. This is the more common at many foreign central banks, and it has received prominent mention in recent speeches and statements by Fed officials. As Beckworth puts it in the title of his post, “The Fed’s Overton Window Is Shifting”.
Beckworth also mentions Warsh’s desire to establish a new Treasury-Fed Accord. The original 1951 Accord established the Fed’s independence from Treasury financing operations. Today’s ample reserves approach has made it far too easy for the Fed to succumb to pressures to monetize deficits and intervene in capital markets to manipulate longer rates. Warsh would surely like to re-establish the Fed’s monetary authority as a separate and independent function from Treasury financing.
The Fed Board of Governors (BoG) must approve changes in interest on reserves (IOR). (Better yet, an act of Congress would be required to prohibit IOR.) But Warsh, who is said to have good relations with the Fed staff and other Fed governors, is less likely to get a majority on the BoG than even the FOMC. For now, he’ll have to be persuasive to gain the support of a majority of either body.
Summary
Kevin Warsh is likely to argue strenuously for reductions in the size of the Fed’s balance sheet, and would almost certainly be happy for the FOMC to defer any rate hikes pending more clarity on a resolution to the Iran conflict. He will also argue for creating greater incentives for banks themselves to invest in Treasury debt, including reformed regulations on bank asset holdings and reduced interest on reserves held at the Fed. Ultimately, that would pave the way for lower rates on a variety of assets. But the Fed should be probably be cautious and gradual in the implementation: the changes to IOR and bank regulations must be well coordinated with QT and money growth must be calibrated to meet the Fed’s inflation target (or better yet, a nominal GDP target — see Part 2 of this post).
I voted for Trump because I considered him to be far preferable to Kamala Harris across a range of issues. I still feel that way, but I’m appalled at a number of actions he’s taken and/or proposed in the 14 months since he took office. As a candidate, I gave Trump a “grade point average” of about 2.68, a solid C+. Here, I’ll grade him on most of the same categories, but I’ve made a few changes to the categories based on developments since his inauguration. My perspective here is generally domestic non-intervention and small government.
Yes, I realize this is tldr; I’m sure I elaborated more than necessary, but you can skip around and scroll to sections in which you might have greater interest. Here’s a list of topics:
Role of Government
Regulation
Border Policy
Antitrust
Foreign Policy
Trade
Taxes
Inflation
Federal Reserve Independence
Federal Spending and the Deficit
Entitlement Reform
Government Waste
Health and Health Care
Abortion
Housing
Energy
First Amendment Rights
Second Amendment Rights
DEI and Its Evil Financial Twin, ESG
Technology
Voting Rights
Education
Role of Government: It’s probably unfair to treat this as a separate category because it might double count specifics mentioned later, but Trump has demonstrated an unfortunate proclivity for wielding government power over private affairs when it suits him politically. On this point, “The Conspicuous Fist of Trump’s State Corporatism”, is a good read. Trump’s actions demonstrate the awful ways in which populism is often a close cousin to socialism. An example is Trump’s economic micro-management and abrogation of property rights in attacking share buybacks. Trump boasts of his efforts to strengthen the American economy by committing public resources to investments in private enterprises, and by “doing deals” with foreign governments to invest in the U.S. When it comes to limited government, candidate Trump’s C is now President Trump’s D.
Regulation: Despite the kinds of intrusions cited above, the Trump Administration has, at the same time, aggressively pursued deregulation of private activity. The goal is to achieve a 10-to-1 ratio of rule rollbacks to new regulatory rules. One can and should assess regulatory measures one-by-one, but there are plenty of rules that wouldn’t pass a reasonable cost-benefit test. On the whole the regulatory state has grown unwieldy and imposes significant costs on producers, and ultimately taxpayers and consumers, often with little compensatory benefit. I applaud the effort to untangle the regulatory state. My grade for Trump here remains an A.
Border Policy: Despite my preference for non-intervention, I support strong border enforcement along with expanded legal immigration.
Illegal entry has plummeted under Trump, a welcome development. Uncontrolled immigration entails a loss of sovereignty and is a poor fiscal proposition. Those with deeper criminal records, from either before or after entry, deserve no concessions. Strict vetting is also necessary to prevent incursions by potential terror threats.
While illegal entry is a crime, otherwise innocent illegals should be treated kindly. For example, rewards can be offered for voluntary deportation, an approach used extensively by the Trump Administration. There are difficult issues such as birthright citizenship, the constitutionality of which has been questioned on textual grounds, and the practicality of which can be shaky, even for children of parents who enter the U.S. legally. Either way, it seems clear that the promise of birthright citizenship should not serve as an incentive for illegal entry.
The Administration has certainly fumbled immigration enforcement in some instances, with cases of improperly detained individuals. Furthermore, very little has been done to advance the cause of increased legal immigration. On this topic I give Trump an overall B-.
Antitrust: This is a case of excessive government meddling with a big dose of favoritism thrown in. Early on, the Trump Administration chose to follow in the footsteps of Biden-era antitrust enforcement with a bias toward penalizing successful businesses on the pretext of “protecting” consumers.
Even worse, the Trump Administration has used the threat of antitrust as a cudgel in pursuit of a variety of objectives that are purely political. For example, in a recent executive order (EO), Trump threatened antitrust action against companies who invest in *too many* single-family homes, a counterproductive prohibition with hoped-for appeal to populist instincts. Then, under Trump, there have been missives from the FTC to tech companies about their failure to provide “balanced” news coverage, a prerogative protected by the First Amendment.
Trump has also interfered with Netflix’s now aborted acquisition of Warner Bros., in favor of a rival offer from Paramount. Trump also engineered the coercive extraction of a U.S. government “Golden Share” in approving the merger of U.S. Steel and Nippon Steel, which Trump claims gives him “total control”, in part by controlling the number of board seats. And he basically extorted a 15% cut for the government for approving a deal allowing Nvidea and AMD to sell the older H20 chip to China.
Trump’s approach to antitrust is very much entangled with the Administration’s uninhibited embrace of industrial policy and public control over private activity. He shares a fantasy common to interventionists that he can leverage the coercive power of government to create just the outcomes he would like.
The grade here is a D, which I think is generous.
Foreign Policy: I’ll try to keep this category separate from trade and tariff issues, though they are intertwined. Trump’s approach to foreign policy is nothing if not bold, and it’s been a mixed bag in terms of success. In the western hemisphere we have the so-called “Donroe Doctrine”, Trump’s effort to establish U.S. hemispheric leadership. So far: we gained a more effective partnership with Panama over the canal and diminished China’s control; decapitated the Maduro regime in Venezuela, asserting control over its oil shipments and undercutting the flow of narcotics through the country; brought the Cuban communist regime to near collapse by choking off its oil imports (but at the cost of greater human suffering in Cuba); partnered with Mexico in eliminating the head of a major drug cartel; and developed closer ties with several conservative regimes in Central and South America.
I’m troubled by the deadly force used against vessels said to be transporting drugs. We might have great intelligence on smuggling operations, but there must be less deadly ways to interdict.
For better or worse, Trump has trolled Canadian leadership in an effort to provoke dissent and gain influence there with respect to trade and security issues. His provocative stance on Greenland is primarily motivated by concerns over security in the Arctic.
Trump’s action against the repressive Iranian theocracy, its support of terror, and its nuclear ambitions has been a military success. Unfortunately, it has come at the cost of some American lives, at least a few civilian casualties in Iran, and a considerable economic cost. We can only hope for quick resolution and a transition to a more liberal regime for the people of Iran. However, Trump was patient to a fault with the mullahs, offering them an off-ramp during repeated rounds of negotiations. They refused to take it.
Of course, Trump is also pro-Israel and has rallied a coalition of nations who might contribute to a revitalized Gaza. I give Trump huge props for his support of Israel and his disgust with anti-Semitism in general.
Trump’s involvement in negotiations between Ukraine and Russia have been unsuccessful. It’s fair to wonder whether he’s cutting Putin way too much slack, as Putin has no intention of relenting. China remains a major threat to U.S. interests and our allies, but many of Trump’s foreign policy initiatives have served to undermine CCP interests.
Trump unique approach has alienated some of our traditional European allies, though he has had success in influencing policy abroad. In Venezuela, it’s worrisome that Trump acts as if he’s cultivating a relationship with Maduro’s replacements, who are probably no better than Maduro except for their eagerness to cowtow to Trump. Well, maybe, maybe not! Also troubling is the collateral damage suffered by the people of Cuba. There are signs of a willingness among Cuban leaders to negotiate with Trump, though hopes for a friendly successor regime might be foolish.
On the whole, I’ll give Trump a B on foreign policy. It’s bold, but he’s had some real successes.
Trade: I gave Trump an F on trade policy as a candidate. He’s more than justified that grade as president. He is a complete dolt when it comes to the benefits of foreign trade, the meaning of a trade deficit, the costs inflicted by tariffs, their complete inadequacy as a replacement for the income tax, and their counterproductive effect on foreign investment in the U.S. His “emergency” tariffs constituted a huge tax increase on the American people, but those were ruled unconstitutional by the Supreme Court. His latest ploy is to impose punitive tariffs under the guise of a balance of payments emergency, but the balance of payments is zero! This too will be struck down in the courts.
Some might argue that Trump’s other foreign policy achievements would not have been possible without the threat of tariffs, but the fact is Trump imposed the tariffs anyway. Yup, it’s an F.
Taxes: In terms of budget effects, the increased tariff revenue (which might not last at present levels) is much more than offset by tax provisions in the One Big Beautiful Bill Act (OBBBA) passed into law last summer. It makes permanent many of the reductions in the Tax Cuts and Jobs Act of 2017 that had been ready to expire. The standard deduction is increased and more limits are placed on itemization. The Act also creates targeted (and temporary) deductions for tips, overtime, auto loans, and seniors, which is inefficient because it treats various forms of income differently, leading to incentives for unproductive reallocations. Those changes also smack of political pandering.
The OBBBA makes permanent some tax incentives for business, such as immediate expensing of short-term asset purchases and domestic R&D investment. It also provides a temporary 100 percent deduction for certain structures and phases out tax credits for green energy production (bravo!).
To the extent that the tax package includes some pro-growth elements, I applaud it. Tax reductions generally are a good thing because they reduce distortions, but Trump has managed to introduce several distortionary elements just the same. I won’t dock Trump for deficit effects here because the deficit is fundamentally a spending problem, not a tax problem. I gave him a C+ on taxes as a candidate, but I’ll boost him to a B- for his first year.
Inflation: Trump doesn’t have real control over inflation as economists define it, but he’s managed to aggravate some price increases just the same. Unfortunately, he makes repeated claims that “prices have fallen” under his leadership, which of course is false. Egg prices perhaps, and oil prices (er… not this month). Of course, in general prices are up, including import prices. Inflation measures have been fairly steady over the past year, but remain stubbornly higher than the Federal Reserve’s target. I give Trump a grade on this topic only because he deserves a penalty for his false boasts. It’s a C, the same as candidate Trump.
Federal Reserve Independence: Trump has relentlessly badgered Jerome Powell and the Fed to somehow engineer lower interest rates. Of course, many key interest rates are market driven and outside the Fed’s direct control. Trump has gone so far as to bring lawfare to bear against Powell, accusing him of misleading Congress regarding cost overruns on the renovation of the Fed’s offices in DC. Of course, it’s not unusual for a president to jawbone the Fed, but Trump has been absurdly aggressive at a time when reducing the Fed’s rate targets would quite possibly backfire. At least Trump’s selection of the next Fed Chairman, Kevin Warsh, was more reasonable than another top candidate who would probably have been a mere punching bag. For this, I’ll lift his grade slightly, from an F to a D-.
Federal Spending and the Deficit: I discuss a few components of spending under other headings below. Beyond those points, Trump has taken every opportunity to find creative uses for taxpayer money. He has proposed a “tariff dividend” for all households funded by the revenue from import taxes. (Refunds of tariff revenue to “payers” are still in question.) At this point, the better alternative is to put extra revenue toward paying down the federal debt. The same goes for any revenue earned from the many “deals” Trump is counting on. Pay down the debt and earn an immediate, certain, and lasting return, rather than installing the government as part owner of otherwise private enterprises having uncertain returns.
Apart from that and the folly of establishing a sovereign wealth fund while the public debt is burgeoning, Trump has made no progress whatsoever on deficit reduction. Granted, he can’t count on strong legislative support despite slight majorities in both chambers of Congress.
The tax cuts in the OBBBA obviously don’t help the cause of deficit reduction. In fairness, rebuilding the military is a major priority. However, interests costs on the debt will keep rising as will discretionary non-defense outlays. At least the East-Wing Ballroom, the Arc de Trump (!), and the Kennedy Center renovation all appear to be privately funded.
Trump deserves a D here. Some of his priorities are terrible, and I can’t cut him any slack based on trends in discretionary spending.
Entitlement Reform: Trump has been silent on reforms to Social Security’s “Old Age and Survivors” programs and Medicare, except to promise no cuts in benefits under his watch. Kick the can! However, the administration has considered cuts in other entitlements, such as Social Security Disability Insurance, Medicaid and Supplemental Nutrition Assistance (SNAP). These programs have been riddled with fraud, so I applaud steps to clean them up. Nevertheless, any progress made here will still be dwarfed by the insolvency of the Retirement and Medicare programs, which Trump considers a third rail for potential reformers. I gave him an F as a candidate, but his anti-fraud efforts help him salvage a C-.
Government Waste: DOGE was short-lived as originally constituted, its execution was clumsy, and the blow-up in Trump’s relationship with Elon Musk was an embarrassment. However, DOGE was a force for stanching the flow of taxpayer dollars through politicized NGOs. The budget savings were relatively small, but the defunded programs were often egregious varieties of government waste. Subsequently, DOGE personnel had an outsized influence on downsizing the federal bureaucracy and targeting waste across various agencies. In addition, the efforts of one-time DOGE workers were put to good use in identifying entitlement fraud, which could and should result in budget savings. Trump gets a B+ on this one.
Health and Health Care: I’ll give Trump credit here for pursuing a more consumer-oriented approach to health care reform, though at least one of his initiatives is counterproductive.
His initial steps took the form of EOs reducing subsidies paid on ACA marketplace policies, ending remaining penalties for violating the ACA’s individual mandate, approving short-term coverages free of certain ACA restrictions, cutting Medicaid expansion funding, and granting more flexibility for states in defining “essential” healthcare benefits. All of these are basically good steps.
Trump issued an ill-conceived EO calling for “Most-Favored Nation” (MFN) prescription drug pricing, which should reduce Americans’ prescription costs but will dramatically undercut life-saving drug research. Hate the pharmaceutical companies all you want, but they must earn a reasonable profit to risk the massive development costs of new miracle drugs, of which they’ve brought many to market. Price controls always create more problems than they solve.
In early 2026 Trump introduced his “Great Healthcare Plan” (GHP). It would codify MFN drug pricing, fund cost-sharing reductions for ACA plans, encourage price transparency, and redirect payments to consumers and away from insurers to facilitate choice and competition. Also launched was the TrumpRx.gov platform featuring MFN pricing. Ironically, the goal here is to improve access to prescription drugs. Good luck!
Under Robert F. Kennedy, Jr., Trump’s HHS Secretary, the “Make America Healthy Again” agenda has emphasized a healthy diet and exercise, including noteworthy changes in the famous food triangle hierarchy. I can’t argue with those. However, RFK Jr. has upended research under HHS, and those actions were rash in a number cases. He wants to address chronic diseases but I’m skeptical of some of his causal claims. I also have mixed reactions to his changed guidance on vaccines. There are reports that the White House has not been comfortable with all of RFK’s pronouncements and is eager to inject more oversight.
I have varied reactions to Trump’s efforts in the health care arena. MFN price capping is a good way to destroy the advantages Americans enjoy in terms of access to innovative drugs, even if they come at a steep cost. RFK Jr. is a wild card, to be fair. Otherwise, while the GHP should help to improve healthcare affordability, it neglects other critical reforms such as ending the disparate tax treatment of health care premiums and deregulating providers. Still, Trump’s grade improved here, from a D+ as a candidate to a B- thus far in his term.
Abortion: No change here. Trump has consistently supported the right to life. He gets an A.
Housing: Build Baby Build! But aside from harping on the Fed to lower interest rates, Trump hasn’t done much to encourage housing supply.
His EO banning institutional investors from owning “too many” single-family homes won’t help affordability because so few homes are owned by large investors. But to the extent that they are, the EO will increase rents and discourage new housing supply. This is another misguided foray into central economic planning.
While I think a 50-year mortgage should be legal, it’s something I believe potential homebuyers should avoid unless they want to risk stubbornly low equity in their homes stretching into retirement. Trump shouldn’t talk this up too much.
Trump has supported the “ROAD to Housing” bill, which has garnered bipartisan support. It would codify the restrictions on ownership of single-family housing by institutional investors and restrict construction of “rent-to-own” housing by such investors. One couldn’t invent a less effective way to encourage supply and promote “affordability”. But the bill would also subsidize demand, which will increase pressure on housing prices even as the bill aims to assist particular groups (e.g., tax credits for first-time homebuyers). Despite all those downsides, the bill actually includes a few steps to boost housing supply, such as making some federal lands available for development, regulatory reform, and tax incentives for builders.
Trump has also discussed changes to government sponsored enterprises (GSEs, Fannie Mae and Freddie Mac), which purchase new mortgages from lenders, including possible privatization. He might be licking his chops for the $300 billion the GSEs owe the federal government, which could be put toward various “deals” he might like to cut. If privatization were to end the explicit government guarantee for mortgage-backed securities issued by the GSEs, mortgage interest rates would rise and it could be quite disruptive for banks.
Housing policy is another mixed bag for Trump, but I’ll give him a B on the strength of his deregulatory effort.
Energy: Drill baby drill! Despite the current disruption to oil shipments through the straight of Hormuz and the spike in oil prices, I deem Trump’s energy policies a success thus far. Largely through deregulation, Trump has opened up the spigots on domestic oil production. He has also realigned energy priorities, eliminating subsidies and mandates for intermittent renewable energy sources in favor of encouraging fossil fuels, hydroelectric, and especially a new emphasis on nuclear power. Some of these steps represent unabashed central planning, so I can’t give Trump an A on energy policy,. However, the preceding green-energy regime was central planning on steroids with the unintended consequence of instability in the power grid. I would greatly prefer a policy of complete neutrality with respect to energy sources, but at least Trump is not cowed by global warming hysteria.
And Trump is considering a temporary suspension of the Jones Act due to the energy crunch brought on by the war in Iran. That would be great except that the waiver should be permanent. The move would lower energy (and other) costs to U.S. consumers and minimize supply disruptions by allowing energy (and other goods) to flow more freely between U.S. ports.
His grade on energy policy is a B.
First Amendment Rights: Trump has not been the defender of free speech that I had hoped. On this, I gave him an A- as a candidate, but his Administration has been belligerent in attacking speech. He (and his FCC Chairman) threaten media outlets with license revocation, his Attorney General says “we will target you” for anything DOJ attorneys might define as hate speech, and Trump has called certain speech he dislikes “illegal”. I also have qualms about an EO issued last year by Trump targeting “campaigns of … radicalization”, which might, in practice, bring any sort of opposition speech under scrutiny. And there are other potentially troublesome provisions for protected speech. Trump’s pure intent might be to stop violent radicalism, which is fine in spirit but hard to bring off without mass surveillance and violations of rights. I therefore downgrade Trump to a C on free speech.
Second Amendment Rights: Trump has not been quite as consistent on gun rights as he was as a candidate. He took a number of actions to reduce burdens and restrictions on gun rights, but in other cases he let restrictions stand, including arrests for gun possession in Washington DC by federal agents and a possible proposal to restrict the gun rights of transgendered individuals. All-in-all, I’ll reduce Trump’s A on gun rights to a B+.
DEI and Its Evil Financial Twin, ESG: There is no question that Trump has done much to cut through the stranglehold that DEI doctrine had imposed on social and economic life. He issued EOs to end DEI practices in the federal government. He also threatened major universities with funding freezes and anti-discrimation actions, an approach that has met with some success. Trump’s words and actions on DEI have reverberated through the private sector as well. He has encouraged individuals who believe they’ve suffered discrimination based on DEI to file lawsuits. The thrust of the Administration’s agenda on DEI and regulatory changes has served to undermine the use of ESG measures. These are intended to draw investors to companies purporting to foster environmental and social goals, which can be at odds with creating value for shareholders. Trump has earned his A in this category.
Technology: As in other policy domains, the record here is marred by misguided industrial policies. That includes the recent snafu over the Department of Defense’s allegation of “supply chain risk” posed by Anthropic. DoD wants carte blanche access to all aspects of any AI model it adopts, including uses in autonomous weapons systems and mass public surveillance. Anthropic said it would not accept that without guardrails, so an apparently infuriated Pete Hegseth moved to designate the company a supply chain risk, an outright punishment that would obviously damage Anthropic’s economic prospects. Yet almost immediately, DoD agreed to an arrangement with OpenAI with guardrails similar to those desired by Anthropic. Now, Trump, who seems to have Hegseth’s back, is readying an EO on the topic… so we shall see. But it’s a mess. Anthropic has filed suit.
And yet Trump has generally been supportive of AI development, signing an order to prevent states from imposing a patchwork of varying, complex regulations. The White House has issued an ”AI Action Plan” to encourage AI exports, minimizing federal regulatory burdens, and “upholding free speech” on “unbiased” frontier models. Let’s hope “unbiased” has a truly neutral definition in this case. Trump has signed a series of EOs related to AI research and deployment, which are linked here.
Post-inauguration, Trump dove right into another socialist joint venture known as Stargate to build data center infrastructure. The rationale for the government’s direct involvement is national security. Of course, that’s the Administration’s rough and ready excuse for almost any kind of intervention.
Trump has helped promote the crypto industry, supporting legislation (the CLARITY Act and the GENIUS Act) enabling more widespread use of stablecoins. He even supports the payment of returns on stablecoins, a development that is unpopular with banks. Trump has also acted to promote cybersecurity and harden infrastructure against malicious actors. More recently, he initiated a program to test eVTOL technologies (electronic vertical takeoff and landing), which are expected to revolutionize local and regional transportation in coming years.
The best I can give Trump on technology is a B-, given his penchant for government control. The Anthropic controversy is a real black eye.
Voting Rights: The Trump-backed SAVE America Act would require an ID proving citizenship to vote in federal elections. It’s stalled in the Senate, seven votes short of the 60 needed to send it to Trump’s desk. GOP senators are unwilling to force a talking filibuster, let alone to use the so-called “nuclear option” to force a simple-majority vote. There is still a possibility of including a voter ID requirement in a budget reconciliation bill if anyone can convince the Senate Parliamentarian that it would have budget impacts. For his part, Trump says he’ll refuse to sign any other legislation until the SAVE Act crosses his desk, though he’s also threatened to issue an EO mandating voter ID should the Senate fail to pass the bill. The constitutionality of such an order would be challenged, of course, but for his determination on the issue, I’ll give him an A+.
Education: This is a quick addition to the list. After inserting the photo of Trump at the top, I realized that I’d completely forgotten to add education as a performance category. Trump’s effort to dismantle the wasteful and unproductive Department of Education is to be applauded. He’s also been an unwavering supporter of school choice. I’ll give him an A here.
I have to stop! That’s 22 categories and a “grade point average” of 2.55 if the categories are equally weighted. It’s a little worse than Trump’s GPA as a candidate (2.67). He could have improved his grades dramatically without his bent for economic intervention, but I’d have to vote for him again given the alternative.
Kevin Warsh has been nominated by President Trump as the next Chairman of the Federal Reserve Board. He’d step into the role in May if confirmed by the Senate. Warsh has served on the Board before, from 2006-2011. During that tenure, he was basically opposed to quantitative easing and expansion of the Fed’s balance sheet, though he voted for QE1 in 2010 in deference to then-Chairman Ben Bernanke, while offering a dissenting opinion.
A Chairman Warsh would have allies some at the Fed, but whatever direction he might prefer for policy, it’s not clear that he can or would swing policy decisions. The Board of Governors has seven members, not all of whom would ally with Warsh, while the Federal Open Market Committee (FOMC), the main policy-setting arm of the Fed, has 12 voting members. And the influential Fed staff might offer resistance to Warsh’s views. Nevertheless, it’s worth asking how his views would take shape as Fed policy if they held sway.
Warsh has said the Fed’s balance sheet should shrink and that the Fed should reduce its target rate for the federal funds rate. Of course, the latter aligns with Trump’s exhortations. Sharply lower rates are desired by the Administration as a tonic for consumers and businesses. Furthermore, reducing the federal government’s interest costs on the public debt would bring a meaningful reduction in the deficit, or at least give Trump room for new spending initiatives.
Some might wonder whether shrinking the Fed’s balance sheet — selling securities to the public — is consistent with an effort to reduce rates. After all, selling securities on the open market by the Fed is usually associated with higher rates and tighter monetary policy. When the Fed’s balance sheet shrinks, we call it quantitative tightening. And yet Warsh calls for lower rates.
Whether you agree with either of the Warsh objectives, their combination can at least be reconciled. A sharp reduction or prohibition on interest paid by the Fed to banks on their reserves (IOR) would go hand-in-hand with other steps by the Fed to reduce short-term interest rates. Eliminating or reducing the rate earned on reserves would create an incentive for banks to purchase the assets that Warsh would have the Fed divest from its balance sheet. That would also have to be accompanied by the reestablishment of minimum reserve requirements for banks.
Of course, bank incentives matter only to the extent that regulations don’t stand in the way. Currently, bank regulations penalize large banks for investing in Treasuries, despite minimal risk. So-called Supplementary Leverage Ratio (SLR) rules require large banks to hold from 3% up to 6% capital against all assets on their balance sheets. In addition, long-term Treasury securities held by banks can trigger flags for rate-risk exposure, and mark-to-market rules might lead to adverse fluctuations in bank regulatory capital.
Warsh has been a critic of expansive bank regulation by the Fed. It’s likely that he would support Vice Chairwoman Michelle Bowman’s push for deregulation, and would be in the same corner on that point as Treasury Secretary Scott Bessent. New rules would take time to promulgate and implement, but surely Warsh recognizes that shrinking the Fed’s $6.5 trillion portfolio would have to be a protracted affair in any case. In fact, an effort to reduce the Fed’s balance sheet in 2019 was halted after liquidity became a concern in the repurchase market.
For perspective on the $6.5 trillion portfolio, private U.S. commercial banks currently hold about $25 trillion in assets, but total bank reserves at the Fed are almost $3 trillion, including reserves held by foreign banks. This limits the extent to which the Fed’s balance sheet can be drawn down via uptake by commercial banks.
A potential switch by the Fed from ensuring “ample reserves” to a system of “scarce reserves” sets off alarm bells among many Fed watchers and within the Fed itself. Resistance to the change is based in part on the need for adequate “backstops” to ensure the safety of the banking system under scarce reserves. In this connection, there always were backstops under scarce reserves, including a well-functioning market for overnight loans of reserves between banks (federal funds) as well as the Fed’s own Discount Window, which it operates as lender of last resort. Most importantly, a steady and reliable policy course would minimize economic and financial disruptions and therefore the need for extraordinary measures. Beyond that, in times of volatility or financial stress it’s necessary to take a longer perspective on asset valuation, rather than relying too heavily on short-term market fluctuations, before leaning into “too big to fail” solutions. In fact, Warsh has said the following:
“The Fed, as first-responder, must strongly resist the temptation to be the ultimate rescuer.
And this:
“The Federal Reserve is not a repair shop for broken fiscal, trade or regulatory policies.“
Would this approach, steadily shrinking the Fed’s balance sheet while scaling back IOR, succeed in reducing key interest rates? It could reduce some consumer and business loan rates that are indexed to the fed funds rate or to the prime rate. Long-term rates are another story, as they are governed by fundamentals like expectations of economic growth and inflation. But beyond the evolution of the balance sheet, the rate of IOR, the fed funds rate, and bank reserves, there are measures of greater interest to the full thrust of monetary policy: the rate of growth of the money supply relative to nominal aggregates like GDP.
Warsh has been described as a “inflation hawk”, and has described himself as a “student of Milton Friedman”. That should assuage any fears that a “Warsh Fed” would be inclined to monetary activism for economic or political reasons.
What Trump might want and what Warsh, as Fed Chairman, is willing or able to do are two different things. Trump has loudly called for an immediate cut in the fed funds rate of 100 basis points or more, which is not going to happen. Such a large cut in the target rate (and IOR) would alarm markets, particularly without firmly establishing the Fed’s intentions for both its inflation (or other) target and the transition to a new reserve/balance sheet regime. In fact, any future policy actions should be predicated on inflation and other economic data.
But who knows? Warsh has said that the proliferation of AI will engender massive gains in productivity, which would be a deflationary force. We can only hope! Perhaps that would provide all the rationale Warsh needs for expansionary monetary policy… a smaller balance sheet with rate cuts and non-inflationary money growth.
There have been comments from Warsh and Treasury Secretary Scott Bessent that the Fed can reach some kind of new “accord” with the Treasury with respect to the Fed’s balance sheet and debt issuance. It’s not clear what this might entail, but it could be a simple matter of clearly outlining plans to level-set market expectations. The Fed has reduced the average maturity of its Treasury debt holdings. Perhaps Bessent can persuade Warsh and the Fed to lengthen maturities as the Fed’s portfolio runs off. But there are other avenues for a possible accord, such as guides for action on the provision of liquidity by the Fed, regulatory matters, and bounds around interventions that might influence debt issuance.
Here are a few bullet points to summarize the Warsh policy scenario I outlined above:
Shrink the Fed’s balance sheet
End the ample reserves regime
Reduce or eliminate interest on bank reserves
Deregulate bank balance sheets
Guide rates lower and provide monetary accommodation for productivity growth
That’s a lot for a new Fed Chair to bring together. Events might conspire to prevent some of those steps, but that’s stab at a Warsh roadmap for monetary policy.
In advanced civilizations the period loosely called Alexandrian is usually associated with flexible morals, perfunctory religion, populist standards and cosmopolitan tastes, feminism, exotic cults, and the rapid turnover of high and low fads---in short, a falling away (which is all that decadence means) from the strictness of traditional rules, embodied in character and inforced from within. -- Jacques Barzun
Sacred Cow Chips 