Kevin Warsh, former member of the Federal Reserve Board of Governors.
Source: Hoover Institution
Federal Reserve chairman-elect Kevin Warsh heads to Capitol Hill on Tuesday to convince lawmakers that he can carry out the president’s campaign to lower interest rates while remaining free from political constraints on policy.
In a highly anticipated hearing before the Senate Banking Committee, the former Fed governor will face questions on a variety of topics, from monetary policy to bank regulation to his own complex personal finances.
Nothing could be more important than establishing boundaries between Fed decision-making and politics.
“You have a tricky communication question,” said Bill English, a professor at the Yale School of Management and the Fed’s director of monetary affairs from 2010-15, a period that outlasted Warsh’s tenure there.
“I suspect that the way he will handle that is to be clear that his views are that the prices may go down, maybe the right price will go down,” said English. “But at the same time, when asked directly about independence, make it clear that you value independence. You think independence is important and that a Fed that is less independent in the medium to long term would be bad for the country.”
Political independence has been a key question in the search for a successor to current Chairman Jerome Powell.
Warsh’s views on independence
In remarks scheduled to be presented to the committee at the start of the hearing, Warsh issued a well-deserved endorsement of the Fed’s independence.
“So let me be clear: monetary policy independence is important. Monetary policy makers must act in the national interest, their decisions be the product of rigorous analysis, rational deliberation, and cloudless decision-making,” he said in a prepared statement.
However, he noted that he does not believe that independence is at risk when the central bank’s actions are questioned by elected leaders, and said that “the Fed must stay the course” and not deviate “from monetary and social policies where it has no authority or expertise.”
Warsh will likely face a barrage of questions about his political loyalty to President Donald Trump, who has made no secret that willingness to lower interest rates was a litmus test for his nominee. Trump nominated Warsh in late January, following a lengthy search process that included nearly a dozen candidates.
Members of Congressional Democrats, including senior member Sen. Elizabeth Warren, D-Mass., is expected to push the nominee on the independence issue, and raise questions about his finances.
If confirmed, Warsh could easily become the richest Fed chairman in the central bank’s 113-year history. Disclosures filed before the hearing show that he will have to divest himself of large amounts of assets to comply with the Fed’s strict rules on when senior officials are allowed to invest.
Warren met with Warsh on Thursday and left with “a deep concern that if he is confirmed, he will become a puppet of Donald Trump.” He also alleged that Warsh did not disclose “more than $100 million in assets.”
The nomination itself may take a while to get out of committee without concern about Warsh’s views.
Sen. Thom Tillis, RN.C., has vowed to remain anonymous until an investigation from the US Attorney’s Office in Washington, DC into the renovation of the Fed headquarters is completed. The court rejected US Attorney Jeanine Pirro’s appeal to Powell, but she vowed to appeal the case.
White House officials are confident that Warsh will eventually meet the committee’s approval, where Republicans hold a 12-10 margin.
“My expectation is that after everybody sees him in their ears and sees how smart he is on his feet, how much he knows about the Fed, and how good his ideas are about getting the Fed back to where it belongs, it’s going to be hard to resist voting ‘yes,'” National Economic Council Director Kevin Hassett said Monday on CNBC.
Making compromises
Once in office, Warsh will lead a Federal Open Market Committee filled with officials who have expressed doubts about the next steps in monetary policy. While markets expect the committee to be suspended for a year, officials themselves are still putting pen to paper and Warsh has voiced support for lower rates.
Warsh “will come with an idea of what he would like to think about and do, and then the economy will deliver what we are working toward,” San Francisco Fed President Mary Daly said last week. “You work with the economy you have, and you plan the economy you have to achieve.”
As for his approach beyond the rate freeze, Warsh last year called for a regime change at the Fed and charged that current officials have a “credibility deficit” that he wants to fix.
English, a former Fed official, said his experience with Warsh is one that others can work with, a quality needed in a consensus-driven central bank.
“He wasn’t really a difficult person for the other policy makers or the staff or anyone to work with,” English said. “So I’m not sure if he’s going to come in and try to fix things quickly without upsetting other policymakers. In order to go along with them, he’ll have to resolve and present his case in a meaningful way.”
