With more deft political maneuvering, Walsh temporarily averted Trump's fury over interest-rate hikes, but it was a delicate balancing act—winning the president's respect without actually ceding control of the Fed's rate-setting decisions. How did Walsh pull it off? And how long can this calm last?
After Federal Reserve Chairman Kevin Warsh pushed for a rate hike on Wednesday local time, Trump did not, as he had in the past when criticizing Jerome Powell, direct his criticism at the chairman himself; instead, he publicly stated that he still supports Warsh.
"Fed mouthpiece" Nick Timiraos wrote that this response sends an unusual signal about the relationship between the White House and the Federal Reserve: Wash appears to be trying, in a manner distinct from Powell, to uphold his monetary-policy judgments while avoiding direct confrontation with Trump.
After the fact, Trump even described this rate hike as a choice that was almost "beyond Walsh's control." He said he had spoken with Walsh before the vote and told him, "You'd better vote with the committee, because it won't make much of a difference."
Trump also said that the Federal Reserve Board is "very difficult to deal with," and added that he still relies on Walsh. This allows Trump to place more of the blame for interest-rate hikes on other Fed officials rather than directly attributing it to the chairman he personally appointed.
A phone call that took White House officials by surprise
According to insiders, the call between Trump and Walsh came as a surprise to many senior advisers in the president's inner circle. Some top government officials only learned for the first time that the two had spoken when Trump mentioned it to reporters in North Carolina.
A senior White House official said that Trump reached out to Wash on his own just days before the Federal Reserve's policy committee convened. The conversation began with a friendly catch-up, only later turning to the market's widely anticipated interest-rate hike decision.
This mode of communication stands in stark contrast to Powell's tenure. In the past, Trump had long urged the Federal Reserve to cut interest rates and repeatedly criticized Powell publicly. Now, he maintains a more direct line of communication with Walsh but has yet to engage in any public clashes with him over rate hikes.
On Wednesday evening, at the private Washington club The Ned, some government officials even pulled out their phones to watch a video of Trump discussing Powell. An attendee said that several officials were relieved that Trump did not directly attack the Fed chair.
However, this détente may prove unstable.
A senior government official said that if the Federal Reserve raises interest rates again in October, with the midterm elections approaching, Wash could once again become a key target of scrutiny by Trump and his advisers.
Wash emphasized: This is the Federal Reserve's own decision.
Timiraos said that Trump's claim has also raised another question: Is Walsh really leading the Federal Reserve, or is he merely being pushed along by other Fed officials?
Trump's trade adviser Peter Navarro has publicly questioned Walsh's policy choices.
"I'm trying to figure out why Mr. Walsh would make a decision that so blatantly defies history and basic economic logic," Navarro said.
He then added, "The subtlety here is that you can do what the president recommends and endorses, but you can do it in a better way. You can signal in your remarks that you'd prefer not to raise interest rates, while still going along with the prevailing trend."
Michael Strain, an economist at the American Enterprise Institute, believes that Trump's remarks are aimed at saving face. He stated that implying Wash did not lead his own committee "is both outrageous and untrue."
Wash himself did not discuss whether he had communicated with Trump. At the press conference, he explicitly described the interest-rate hike as a decision made after the Federal Reserve's own deliberations.
Wash said, "This is a sober decision, a serious decision, and a responsible decision—one that we have been preparing for and deliberating since I joined the Federal Reserve in May."
He has previously stated that monetary policy will be guided by economic conditions, rather than political considerations.
White House spokesperson Kush Desai stated, "President Trump has repeatedly affirmed his confidence in Federal Reserve Chairman Kevin Warsh and has upheld both his First Amendment rights as a U.S. citizen and his duty as Commander-in-Chief to offer opinions on policy-making."
Wash's way of interacting with Trump differs from Powell's.
Wash has a closer personal relationship with Trump than Powell does. During his first term, Trump had chosen Powell to serve as Fed chair, but as early as 2017, he had also interviewed Wash for the position.
Kevin Hassett, director of the White House National Economic Council, said last month that the two "have a very close, long-standing relationship… and they have consistently discussed the economy."
People who have spoken with Wash describe the chairman as believing that he can both formulate policies in line with economic needs and, by managing his relationship with Trump, minimize public conflicts.
This is also an important distinction between Walsh and Powell.
Wash refrained from using language that might directly implicate the White House in Federal Reserve decision-making. When discussing the Fed's independence, he also preferred to characterize it as a principle to be put into practice, rather than a position that must be repeatedly proclaimed publicly.
On Wednesday, while explaining the rationale for the rate hike, he noted that the Federal Reserve has revised its assessment of how overseas conflicts might unfold, thereby raising the risk of higher energy and commodity prices.
"Hotspots around the world are nowhere to hide," Wash said.
However, he did not directly mention a war with Iran, instead using the term "geopolitics."
This approach stands in contrast to Trump's long-standing position that the president should be able to influence interest-rate policy. Last December, when considering candidates for the next Fed chair, Trump stated that he hoped the chair would heed his views.
"I'm a smart voice and should be heard," Trump told The Wall Street Journal at the time.
Should we manage our relationship with the president, or keep our distance?
Ellen Meade, a former Federal Reserve adviser and now a professor at Duke University, believes that during Trump's presidency, safeguarding the Fed's independence may require an approach different from that under Powell.
She believes that the Federal Reserve Chair may need to proactively manage the relationship between the president and the central bank, including informing the White House in advance of policy decisions that might be unpopular, in order to prevent Trump from "immediately flying into a rage" after the policies are announced.
However, Mead emphasized that there is a clear distinction between advance notification and seeking prior approval.
Notifying the White House in advance that the Federal Reserve will announce its interest-rate decision at 2 p.m. is a form of communication, intended to prevent the president from being caught off guard. Seeking the president's endorsement of policy decisions, however, is a different matter and could undermine the Fed's independence.
She is also unsure whether the practices from Powell's tenure still apply to Walsh.
"I can't see how Wash could do this job like Powell without running into trouble," she said.
Mead believes that Powell did not intend to provoke Trump, and his approach at the time was also reasonable. However, in hindsight, "it almost seemed like he was picking a fight."
Historically, another approach has also been adopted.
Federal Reserve Chairman Alan Greenspan maintained close ties with presidents and their advisers throughout four administrations. In 1993, during Bill Clinton's first address to a joint session of Congress, Greenspan even sat beside the then‑First Lady, Hillary Clinton.
However, maintaining a close relationship does not mean that policy must necessarily defer to the president.
In 1992, Alan Greenspan fell out with President George H. W. Bush over issues such as the pace of interest-rate cuts. Bush later publicly complained that the Federal Reserve had cut rates too slowly that year, and in 1998 he remarked, "I reappointed him, and he let me down."
Timiraos noted that, for Walsh, the real risk may lie in the possibility that if the White House comes to view interest-rate hikes not as his policy choice but as a decision imposed by other Fed officials, it could instead prompt the administration to intervene further in the Federal Reserve.
Meade said this could even prompt the White House to step up pressure on other Federal Reserve officials.
Last year, Trump attempted to fire Federal Reserve Governor Lisa Cook. Although the Supreme Court blocked this dismissal this summer, the White House has recently taken steps to try to push forward with it again.
Earlier this year, Trump also welcomed the criminal investigation into Powell. The investigation was only dropped after it threatened to derail the confirmation process for Walsh.
Meanwhile, some officials within the Federal Reserve are also concerned about an upcoming report on the collapse of Silicon Valley Bank. The report was commissioned by Michelle Bowman, the Fed's vice chair for supervision, a position that Trump appointed Bowman to last year.
Some Federal Reserve officials worry that the report's findings could be used by the White House to push for the dismissal of Michael Barr, Bowman's predecessor, who currently remains a member of the Federal Reserve Board.
Therefore, what Wash faces is not merely political pressure following a rate hike. Timiraos writes that the real challenge for this chair may be how to maintain communication with Trump while simultaneously convincing both the markets and the Fed's own ranks that interest-rate decisions still originate within the central bank itself—perhaps a problem he will need to address over the long term.
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