Warsh-Wall Street Tension: Trump's Influence on Fed Chair Raises Credibility Concerns

The Federal Reserve's credibility and rate policy are at risk due to President Donald Trump's closer relationship with Fed Chair Kevin Warsh, according to traders.

Trump has spoken repeatedly with Warsh since his confirmation as Fed chair, a sharp break from the president's fraught relationship with former Chair Jerome Powell. The White House does not deny the contacts and says Trump is giving Warsh the space he needs to restore confidence and competence in Fed decision-making while respecting his independence.

Despite this, market measures such as five-year inflation swaps have edged down but remain above 2%, leaving Warsh's Fed policy at risk of credibility tests if inflation expectations rise. Former New York Fed President and Treasury Secretary Timothy Geithner says that risk could leave Warsh needing to do more than otherwise would be necessary to earn credibility, potentially at a cost to growth.

Warsh has indicated that he is comfortable hearing views from political leaders, including the president, while maintaining that interest-rate decisions remain his own. A White House official says Trump is using Warsh as a sounding board rather than publicly pressuring him as he did with Powell.