Kevin Warsh, President Trump’s nominee to lead the Federal Reserve, sought to reassure lawmakers Tuesday that he would be an independent leader of the nation’s central bank.
Testifying before the Senate Banking Committee amid questions about his fealty to Trump, his views on monetary policy and his extraordinary personal wealth, Warsh pushed back against speculation that he would acquiesce to the president’s repeated demands for the Fed to lower interest rates.
“The president never once asked me to commit to any particular interest rate decision, and nor would I agree to it if he had,” Warsh said. “I will be an independent actor if confirmed as chair of the Federal Reserve.”
At the same time, Warsh made it clear that he wants to shake up the way the central bank currently operates. Among other things, Warsh suggested that he may change the way the Fed measures inflation, reduce the Fed’s use of policy tools other than interest rates, and limit press access to the bank. “Status quo practices and policies are especially harmful when the world is changing this fast,” Warsh said.
Who is Warsh? A financier with a personal fortune of well over $100 million, Warsh served as a member of the Federal Reserve Board of Governors from 2006 to 2011. He is affiliated with the conservative Hoover Institution at his alma mater, Stanford University, and has served as an executive director at Morgan Stanley and worked alongside famed investor Stanley Druckenmiller, with a focus on the tech sector.
Inflation hawk or dove? Warsh has been a critic of Fed policy, arguing that it has been too dovish on inflation as officials focus more on the second part of its mandate, the labor market. He blamed the Fed for the inflationary wave that surged through the economy in the wake of the Covid crisis, saying, “Inflation is a choice, and the Fed must take responsibility for it.”
With Americans still feeling the “fatal policy errors going back four or five years,” Warsh called for “a regime change in the conduct of policy ... a new and different inflation framework.”
At the same time, and perhaps contradictorily, Warsh suggested that the Fed might take a more dovish approach on inflation, telling lawmakers that officials should focus on underlying inflation while highlighting the “trimmed-mean” measure that shows inflation running close to the central bank’s 2% target — much lower than the recent headline number of 3.3%. To some observers, it sounded like Warsh was laying the groundwork for dovish rate cuts sooner rather than later.
Democratic Sen. Chris Van Hollen noted the sharp change in perspective. “You seem to have swung 180 degrees to the opposite direction to embrace lower rates, a view that conveniently aligns with the president who nominated you,” Van Hollen said.
In another point of disagreement with the current Fed approach, Warsh said he did not think Trump’s tariffs have been inflationary. Powell has argued that Trump’s tariffs have been a driver of inflation in recent months, and the primary reason that the inflation rate has remained above target.
A smaller balance sheet: Warsh has called for the Fed to shrink its balance sheet, which the central bank has used since the financial crisis to provide stimulus and calm financial markets by purchasing assets such as mortgage bonds and Treasuries. Warsh has argued that the expanded balance sheet helps Wall Street more than Main Street, raises short-term interest rates and pushes the Fed further into the political arena than it needs to be.
“Working with the Treasury Secretary, we're going to have to find a way in which we can take the balance sheet and make it smaller,” he said. If the Fed can reduce its holdings, “interest rates could be lower, inflation could be better, and the economy could be stronger,” he added.
Warsh did not, however, explain how he would go about shrinking the balance sheet.
Questions about wealth: Sen. Elizabeth Warren, the top Democrat on the committee, expressed concerns about Warsh’s vast wealth, some components of which are opaque. Warren asked if his investments are “affiliated with President Trump and his family, companies that have facilitated money laundering, Chinese-controlled companies or financing vehicles established by Jeffrey Epstein?”
Warsh declined to answer directly, saying instead that he would sell all of his assets before taking office. He told Sen. Jack Reed that his investments will be “as plain vanilla as possible” and “sitting in something like cash.”
More broadly, Warren said she was concerned that “having a sock puppet in charge of the Fed would give the president access to the Fed's powerful authorities to enrich himself, his family and his Wall Street buddies.” Asked if he would be Trump’s “sock puppet,” Warsh said, “Absolutely not.”
A point of resistance: Warsh testified before the committee despite a pledge by one of its members, Republican Sen. Thom Tillis, to oppose any nominee to lead the Fed until a federal investigation of the current chair, Jerome Powell, comes to an end.
The Justice Department is investigating Powell’s management of a $2.5 billion renovation project at the Fed’s headquarters that has gone over budget, and the probe has been seen by many observers as an abuse of power by Trump intended to pressure Powell into lowering rates.
Tillis told Warsh that he has no questions about his fitness for the office. “You have extraordinary credentials. They’re impeccable,” Tillis told Warsh. “The problem I have is where we are right now.”
Tillis said he wants the Powell investigation to end, “so I can support your confirmation.”
What happens next: Warsh appears to have enough support to win confirmation, but his nomination will remain in limbo until Trump brings the investigation of Powell to an end. The question is whether Warsh’s appearance Tuesday will be enough to convince Trump to end the probe and clear the path for his new Fed chief to step in when Powell steps down on May 15. If not, Powell is expected to remain in place as he waits for his successor.
As Sen. John Kennedy said on Monday, “The president’s current nominee will be ultimately confirmed. In what decade that happens, I’m not sure.”