Kevin Warsh wins the midterm elections, for now

Kevin Warsh spent Saturday in Kentucky watching a horse he co-owns win a $1.75 million race. On Tuesday he didn't even have to choose the winning horse. Although the election results that night were devastating for the Republicans, the party of the chairman of the Federal Reserve (Fed), their own fortunes have improved markedly, at least in the short term. Democrats, in opposition, can now stop the White House's attempts to transform the central bank through appointments and intimidation. In addition, they have forced investors to rethink the inflationary effect of the Iran war and the rise of artificial intelligence. Warsh can now focus on monetary policy, at least until his own renewal in office approaches.

That the Democrats have taken control of the US Senate is enormously important for the Fed. Senators on the Banking Committee subject the candidates for central bank governor, who need the support of the majority to be confirmed, to tough questioning. The odds of a Trump nominee passing muster from the combative Massachusetts Sen. Elizabeth Warren, who will chair that committee, are not good. Even if former President Jerome Powell, who remains on the council despite having finished his term at the head of the institution, decides to retire, there is little risk that a Trump stalwart will occupy his position. Additionally, there are no other imminent vacancies. The White House's harassment of Powell and Governor Lisa Cook with unfounded accusations could also take a backseat. After all, now it will be the Government that has to face aggressive investigations.

Neutralizing threats to the Fed's independence should be positive for long-term bond yields, which depend on institutional integrity. Even better would be to reduce the pressure from inflationary policies such as the Iran war and erratic tariffs, which will be in the Democrats' crosshairs. Although Trump will retain broad powers in foreign and trade policy, Democrats say they have a mandate to limit both. Additionally, a divided government in Washington often holds back big tax or spending measures from either party, bringing more predictability to fiscal policy.

Not everything will be a bed of roses. Warsh will also be subject to oversight by a hostile Congress. He already faces some skepticism and divisions on the Fed board ahead of the election. His semiannual appearances on Capitol Hill will not be comfortable, because he has barely accumulated the goodwill that Powell, also a Republican and appointed by Trump, earned. If the political winds continue to blow in favor of the Democrats, he would have little chance of being renewed in office. But all of these are normal problems for the head of the country's monetary policy. After Tuesday, at least you'll have fewer anomalous problems.