Kevin Warsh is taking another step toward his decade-long goal of winning the top job at the Federal Reserve by appearing at a hearing before the Senate Banking Committee on Tuesday. But the role that he may eventually assume could turn out vastly different than what he expected.
Inflation is worsening as the Iran war has spiked gas prices, making it much harder for the Fed to implement the interest rate cuts President Donald Trump so desperately seeks. The conflict could also slow the economy as well as hiring. And if Warsh ultimately becomes chair, he may very well find his predecessor, Jerome Powell, still sitting on the Fed’s governing board, an uncomfortable arrangement that hasn’t occurred since the late 1940s.
Warsh, a former top official at the Fed and a wealthy investor, will likely face a range of tough questions at the hearing. Democrats on the committee have already signaled they will press him about what they argue is a lack of transparency regarding some of his vast financial holdings, which total more than $100 million, according to a recent disclosure.
Another top issue will be Trump’s repeated demands for cuts in the Fed’s short-term interest rate, which has created the perception that Warsh was nominated to do the president’s bidding. Most other Fed officials have said they support keeping the central bank’s key rate unchanged, now that inflation has begun to rise again.
Warsh expressed support for the Federal Reserve’s independence in written remarks released Monday that he will deliver at the hearing.
He said such political independence is “essential,” but he also said it wasn’t threatened when “elected officials — presidents, senators, or members of the House — state their views on interest rates.” Trump has repeatedly urged Powell to cut the Fed’s key rate from its current level of about 3.6%.
Warsh also underscored his commitment to one of the Fed’s two congressional mandates: Keeping inflation low. He did not mention the other, which is pursuing maximum employment.
“Inflation is a choice, and the Fed must take responsibility for it,” Warsh said in his prepared remarks. A tight focus on inflation typically leads officials to keep interest rates high to cool spending, rather than reducing rates to boost the economy, as Trump has demanded.
While the long-delayed hearing is a necessary step for Warsh, it’s not clear when the committee may even be able to vote on his nomination. The Justice Department is investigating Powell and the Fed over a building renovation, and Sen. Thom Tillis, a North Carolina Republican, has said he would effectively block Warsh until the probe is dropped.
“Clearly there’s a majority of the committee that’s not going to move this nomination forward, especially while this sham of a criminal investigation is going on,” Sen. Tina Smith, a Democrat from Minnesota, told reporters on a conference call Monday. “It feels a bit like we’re going through the motions when we really have not addressed the fundamental challenges that this nomination has.”
The turmoil could make a potential transition from Powell to Warsh an unusually turbulent one for the world’s most important central bank, which has typically seen smooth transfers of power. Should the change in leadership prove particularly bumpy, it could unnerve markets and lift longer-term interest rates.
Powell’s term as chair ends May 15. He said last month that he would remain as chair until a successor is named. Powell also is serving a separate term as a member of the Fed’s governing board that lasts until January 2028. Fed chairs typically leave the board when their terms as chair end, but Powell also said last month he would remain on the board, even if a new chair is approved, until the investigation is dropped.
When asked about Powell’s comments, Trump said he would fire Powell if he tried to stay at the Fed. Yet Trump’s previous attempt to remove a Fed governor, Lisa Cook, has been tied up in courts. During oral arguments in January, a majority of justices on the Supreme Court appeared to lean toward letting Cook keep her job.
—Christopher Rugaber, AP Economics Writer