By Ann Saphir
April 17 (Reuters) - Kevin Warsh may have plans for big changes at the U.S. central bank, but like previous Federal Reserve leaders cannot know what economic surprises he may need to deal with once he is in the role, San Francisco Fed President Mary Daly said on Friday.
"He'll come in with an idea of what he would like to think about and do," Daly told an advisory board to UC Berkeley’s Fisher Center for Real Estate & Urban Economics. "And then the economy will deliver what we actually
work on, and that will be the journey of every Fed chair and all the Fed policymakers and all the Fed employees."
As U.S. President Donald Trump's pick to succeed Fed Chair Jerome Powell, Warsh has indicated support for cutting interest rates as Trump wishes.
WAR RAISES INFLATION CONCERNS
Since the Iran war began, however, even the Fed's most dovish policymaker, Fed Governor Stephen Miran, has become less so in the face of high oil prices and signs that underlying inflation may be trending upward again.
Daly on Friday said that before the Iran war she had thought one or two interest-rate cuts might be needed this year, but she is now in "wait-and-see" mode as she monitors how long the conflict lasts and oil prices stay elevated.
A top researcher at the San Francisco Fed during the 2007-2009 financial crisis, when Warsh was Fed governor, Daly expressed confidence that as Fed chair, Warsh would "serve the American people" and strive to deliver the Fed's congressionally mandated goals of price stability and full employment.
"I know him well enough to (know) he will absolutely hold to those responsibilities of the job," she said.
At the same time, she said, no Fed chair can know ahead of time what kind of economy they will be dealing with once they take the job.
Fed Chair Alan Greenspan, she noted, faced a productivity shock that allowed the economy to grow faster without generating price pressures that would require the Fed to raise rates. Fed Chair Ben Bernanke dealt with a financial crisis that required the central bank to slash rates to avert a deflationary spiral.
"You work with the economy you have, and you plan for the economy that we're supposed to achieve, and that's always been our work, and I think it always will be," said Daly.
WARSH SEEKING COORDINATION WITH TREASURY
Warsh says he wants "regime change" at the central bank and has called for more coordination with the U.S. Treasury Department, particularly over the size of the Fed's balance sheet.
He testifies at a Senate Banking Committee confirmation hearing next Tuesday. Trump administration officials have expressed confidence he will be at the Fed's helm by May 15, when Powell's leadership term ends, though Republican Senator Thom Tillis has promised to block his confirmation until the Department of Justice ends an investigation into Powell that Tillis -- and Powell himself -- see as a threat to the Fed's independence.
The Fed needs to conduct monetary policy independently of politics, Daly said, so it can keep economic conditions stable and so businesses and households can plan even through a change in administration.
At the same time, good communication between the nation's policymakers is a positive thing, Daly said. The Fed's relationship with Treasury has varied over time, she said, with increased coordination during crises.
"They are also issuing a lot of Treasury securities, and so being connected to them is important," Daly said, of the Fed's relationship with the Treasury Department. "I will leave it to Kevin Warsh when he comes and other policymakers as they decide what we will exactly do, but I think evolution is in itself not dangerous."
(Reporting by Ann Saphir, Editing by Franklin Paul and Rod Nickel)
