Warsh pushes his ‘regime change’ plan at Senate hearing: Analysis

Kevin Warsh faced searching questions at his Senate confirmation hearing on Tuesday. Democrats and sometimes Republicans objected to his complicated finances, his relationship with President Donald Trump and what is often seen as a broad-eyed endorsement of the promise of artificial intelligence. But Warsh’s one central issue went through without question: his plan for what he called “regime change” at the Federal Reserve.

Warsh planned for years to radically change the way the Fed operated, down to the definition of the word “inflation.” That plan emerged with incomplete hearings, leaving Warsh in a strong position if quickly confirmed to try to overhaul the Fed. Any attempt at major reforms will cause friction and tension within the Fed, as will its efforts to quickly lower interest rates. But Warsh said Tuesday that he welcomes a “good family fight,” and opposition from some Fed policymakers could be beneficial in Warsh’s eyes as he seeks to overturn their way of doing business.

Warsh has faced attacks on his credibility since Trump nominated him in January. The president has publicly demanded that the interest rate be reduced to less than 1%. He tried to fire one Fed governor and encouraged the Justice Department to continue the investigation of current Fed Chairman Jerome Powell. The courts decide those matters.

Warsh tried to allay concerns about Trump. “The president has never lectured me generally or specifically or suggested that I commit to any interest,” he told lawmakers under repeated questions about what he may have said to Trump.

But that followed several difficult conversations.

“I have to praise you for the way you are able to deflect questions but not answer them,” said Sen. Jack Reed, D.-RI, told Warsh. “It’s a skill. Unfortunately, it’s not a good skill for the chairman of the Federal Reserve Board.”

Other former Fed officials have also expressed skepticism. Former Chair Janet Yellen said recently that she believed Warsh would have a tough time swaying the Federal Open Market Committee, where he would need a majority of 11 votes to change rates. “I really don’t see the FOMC accepting this in the short term,” Yellen said.

Probably not, and while Warsh can’t completely ignore other Fed officials, he has spent his time since leaving his former Fed post in 2011 outing himself against them.

“Milton Friedman had a quote that always stuck with me,” Warsh said at the hearing. Warsh once worked as a research assistant for Friedman, an influential economist. “He was always worried about the government officials who attracted him and called him a dictator. The existing practices and policies are dangerous especially when the world is changing at this pace,” he said.

Warsh will break that status. He refused at the hearing to commit to continuing the regular press conferences, which the Fed has held since the financial crisis. He will abandon previous guidance, the Fed’s way of signaling to markets where it wants interest rates to go. He will even move away from the Fed’s preferred measure of inflation, the core measure of personal consumption expenditures, which he dismisses as “a negative view of what’s going on” with rates. “We don’t have to do heavy swag anymore.”

These ideas are not just window dressing for Warsh. They are the way to lower the long-term interest rates that plague Americans in the form of high mortgages and credit cards. Warsh believes markets have pushed those rates higher because of the Fed’s mixed policy, including the recent rise in post-Covid inflation — but it’s going way back. The Fed, he says, has lost credibility.

Warsh left the Fed in 2011 because, he said at the time, he opposed a set of policies that left the central bank too entrenched in the American economy. A big part of that was the Fed’s asset purchase program, called quantitative easing, which has left $6.7 trillion of financial assets on the Fed’s balance sheet. That plan was important to stave off the financial crisis, Warsh said at the time, but it should have been dismantled long ago.

“Winning the war against inflation in 2008 was a necessary but not sufficient condition to win the peace and ensure a solid foundation for economic prosperity,” Warsh said in a September 2009 speech. The Fed needs to step back from controlling its economy, Warsh said. The Fed has ignored “market discipline,” or allowed sick firms to fail, he argues. The result is an economy that is far more fragile than it should be, with officials eager to pounce on any signs of trouble.

In 2023, after Silicon Valley Bank and other institutions failed and were bailed out by the Fed and other government agencies, Warsh blamed this episode on the Fed’s codification of the economy. “A decade-long period of free money, negative interest rates, and massive asset purchases by the world’s major banks in their treasury departments is leading to deep penetration of financial markets, among regulators, and [among] market participants,” he said in an interview that year.

Warsh’s diagnosis of the Fed’s problems is not that it has wrong interest rates. Instead he believes that the whole institutional way of seeing the world since the financial crisis is wrong. That’s not fixed, in his mind, by getting interest rates a quarter-point higher or lower. Instead, it is fixed by coming to the Fed and showing the market and the public that a new sheriff is in town.

It’s too early to tell whether Warsh can file a case for Trump’s proposed rate cuts, even though he has the advantage of time. The longer his appointment lasts, the more likely the Fed and other central banks will be able to look past the oil price shock of the Iran war and return to worrying about a weakening labor market. That would be against the cuts.

Regardless, if Warsh is brought to the Fed amid cries of discontent from the central bank, they can only help make his case to the public that this is an institution that has lost its way. The Senate, at least, has shown little sign of dissent.