Kevin Warsh, former member of the Federal Reserve Board of Governors.
Courtesy: Hoover Institution
Federal Reserve chair nominee Kevin Warsh travels to Capitol Hill on Tuesday to convince lawmakers he can carry out a presidential push for lower interest rates while remaining free of political constraints in setting policy.
In a much-anticipated hearing before the Senate Banking Committee, the former Fed governor will face questioning over a variety of subjects, from monetary policy to banking regulation to his own complicated personal finances
None likely will be more important than establishing the boundaries between the Fed’s decision-making and politics.
“He has 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 overlapped with Warsh’s time there.
“I suspect that the way he’ll handle that is by being clear that his views are that rates can likely go lower, maybe a fair amount lower,” English said. “But at the same time, when asked directly about independence, be clear that he values independence. He thinks that independence is important and that a less independent Fed in the medium and long term would be a bad thing for the country.”
Political independence has been a key question surrounding the search for a successor to current Chair Jerome Powell.
Warsh views on independence
In remarks he’s scheduled to deliver to the committee at the hearing’s start, Warsh issued a qualified endorsement of Fed independence.
“So let me be clear: monetary policy independence is essential. Monetary policymakers must act in the nation’s interest, their decisions the product of analytic rigor, meaningful deliberation, and unclouded decision-making,” he said in prepared text.
However, he noted that he doesn’t believe independence is endangered when the central bank’s actions are questioned by elected leaders, and said “the Fed must stay in its lane” and not veer into “fiscal and social policies where it has neither authority nor expertise.”
Warsh likely will face a bevy of questions about his political allegiance to President Donald Trump, who made no secret that a 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.
Congressional Democrats, including ranking member Sen. Elizabeth Warren, D-Mass., are expected to push the nominee on the independence question, as well as raise questions over his finances.
If confirmed, Warsh would easily be the wealthiest Fed chair in the central bank’s 113-year history. Disclosures filed ahead of the hearing indicate he would have to divest himself of a significant level of holdings to be in compliance with what have become strict Fed rules on where senior officials are allowed to invest.
Warren met with Warsh on Thursday and left with “deep concerns that if he is confirmed, he will be Donald Trump’s sock puppet.” She also alleged that Warsh had not disclosed “more than $100 million in assets.”
The nomination itself may take a while to get out of committee independent of any concerns about Warsh’s views.
Sen. Thom Tillis, R-N.C., has vowed to hold up the nomination until an investigation is completed from the U.S. Attorney’s Office in Washington, D.C. into renovations at Fed headquarters. A court overturned U.S. Attorney Jeanine Pirro’s subpoena of Powell, but she has vowed to appeal.
White House officials are confident Warsh ultimately will meet the approval of the committee, where Republicans hold a 12-10 advantage.
“My expectation is that after everybody sees him in his hearing and sees how deft on his feet he is, how knowledgeable about the Fed he is, and how good his ideas are about returning the Fed towards a place where it’s nonpartisan, that it’s going to be hard to resist voting ‘yes,'” National Economic Council Director Kevin Hassett said Monday on CNBC.
Forging consensus
Once in office, Warsh will head a Federal Open Market Committee populated with officials who have expressed misgivings about the next steps in monetary policy. While markets expect the committee to be on hold the rest of the year, officials themselves still have penciled in a cut and Warsh has expressed support for lower rates as well.
Warsh will “come in with an idea of what he would like to think about and do, and then the economy will deliver what we actually work on,” San Francisco Fed President Mary Daly said last week. “You work with the economy you have, and you plan for the economy that you’re supposed to achieve.”
As for his approach beyond rate-setting, Warsh last year called for regime change at the Fed and charged that current officials have a “credibility deficit” that he wants to fix.
English, the former Fed official, said his experience with Warsh was one who could work with others, a quality needed at the consensus-driven central bank.
“He was not somebody who was really difficult for the other policymakers or for the staff or for anybody to work with,” English said. “So I’m not sure he’s going to go in and really try to shake things up right away without moving the other policy makers along. To move them along, he’s going to have to be making arguments and making his case in a reasonable way.”
