Dive Brief:
- Kevin Warsh, nominated to lead the Federal Reserve, told the Senate Banking Committee Tuesday that he would not serve as a “sock puppet” to Donald Trump and cave in to pressure from the president for a reduction in the main interest rate.
- A former Fed governor, Warsh said the president has never urged him to reduce the benchmark interest rate, and he deflected comments by committee Democrats suggesting that he would allow Trump to compromise central bank independence.
- “I’ll be an independent actor as chairman of the Federal Reserve,” Warsh told the committee. “The president never asked me to predetermine, commit, fix, decide on any interest rate decision in any of our discussions, nor would I ever,” he said.
Dive Insight:
For several months prior to his nomination as Fed Chair in January, Warsh criticized the central bank for keeping interest rates too high, voicing a position that aligned with Trump’s.
Warsh on Tuesday, while not expressing an opinion about the current level of borrowing costs, criticized the Fed for keeping the federal funds rate too low early this decade and failing to curb an inflationary surge as the COVID-19 pandemic faded away.
Inflation has persisted above the central bank’s 2% target for five years. Price pressures rose during the past year after Trump imposed the highest tariffs since the 1930s and ordered strikes on Iran in late February, pushing up energy prices.
Rather than cite tariffs or the war with Iran, Warsh blamed Fed policymakers for the stubborn, above-target inflation.
“We are still dealing with the legacy of the policy errors in 2021 and 2022,” Warsh said. “Once you let inflation take hold in the economy, it's more expensive and harder to bring it down.”
“The fatal policy error going back four or five years is still a legacy that we're dealing with,” he said. “We need, in my judgment, fundamental policy reforms to fix it.”
Warsh said he favors “a regime change in the conduct of policy” that includes “a different, new inflation framework” and reliance more on changes to interest rates rather than the Fed balance sheet to influence price pressures and economic growth.
The central bank will need to act without delay in overhauling how it handles inflation, Warsh said.
“We don't have a long time to do new studies and contemplate what reform should be,” he said. “We have a short window to try to bring inflation back down to where it should be to ensure price stability.”
Productivity gains from artificial intelligence may allow the central bank to reduce the federal funds rate and handle inflation with greater ease, Warsh has said.
“AI is quickly becoming something like escape velocity,” Warsh said. “It's important to revisit the Fed's models and see whether this innovation cycle, where it could have over time improvements in the price level and make the Fed's job on inflation easier.”
In opening remarks, Senator Elizabeth Warren of Massachusetts, the committee’s ranking member, said Trump nominated Warsh in order to have a compliant leader of the central bank.
“The president has repeatedly and illegally attempted to take over the Fed,” Warren said. Trump seeks to “use monetary policies to artificially juice the economy in the short term, and this is his last chance to do that before the November elections.”
“Having a sock puppet in charge of the Fed would also give the president access to the Fed's powerful authorities to enrich himself,” Warren said.
Warsh pushed back, denying he would do Trump’s bidding.
“I take my responsibility to be an independent leader of the Federal Reserve very seriously,” Warsh said. “If confirmed by this body, I take the integrity of the office and my personal integrity very seriously.”
