Federal Reserve Chairman candidate Kevin Warsh told senators that the Fed “must maintain the status quo.”
Kevin Warsh faces tough questions at Fed chair confirmation hearing
Federal Reserve chairman nominee Kevin Warsh faced pointed questions from senators over the ethics of the Fed’s independence and pressure from President Trump.
President Donald Trump’s nominee for Federal Reserve Chairman Kevin Warsh faced questions from the Senate Banking Committee on Tuesday, April 21, even as the president’s own shadow dominated the hearing.
At the morning hearing, Warsh, a financial executive who previously served on the Federal Reserve board, fielded questions from Republican lawmakers who support his nomination. He also faced intense scrutiny from Democrats, led by Sen. Elizabeth Warren of Massachusetts, over how much independence he would maintain in the face of pressure from President Trump, whose administration has launched an investigation into current Federal Reserve Chairman Jerome Powell. Many involved, and even Powell himself, have argued that the charges are politically motivated and an attempt to influence the board over interest rate decisions.
Warsh has previously said he believes the central bank has strayed from its mission in recent years. He has also argued that the Fed’s independence is important, but said on Tuesday that he believes it needs to be earned. In response to a question, he said politicians are trying to influence the Fed’s actions because the Fed has not fulfilled many of its promises.
While Warren and other Democrats harshly criticized the wealth holdings of Warsh, who is married to one of the heirs to the Estée Lauder fortune, much of the hearing focused on how she guides the committee on decisions that affect the economy.
It’s unclear when senators will formally vote on Warsh’s confirmation. But Warsh’s confirmation could depend on a resolution to investigate, as Sen. Thom Tillis (R-N.C.) and Democrats oppose the Justice Department’s continued investigation into Powell, whose term as Fed chair ends on May 15.
“Independence must be won”
Mr Warsh told the committee that central bank independence was “very important” but it “must be earned”.
“That’s what you get by delivering on your promises,” Warsh said. “The Fed has not delivered on these promises, so we shouldn’t be surprised to see political voices creeping into the Fed.”
In a combative exchange, Warren asked Warsh to name one aspect of Trump’s economic policies that she disagreed with. Warsh said he disagreed with the president’s explanation that he was a “core casting” candidate.
“It’s very cute, but we need an independent Fed chair,” Warren said. “If you can’t answer these questions, you don’t have courage and you don’t have independence.”
Warsh said later in the hearing that he didn’t have a problem with the president’s stated preference for low interest rates, but that he had never asked Trump to commit to a specific interest rate decision.
“The president has never asked me in any of our discussions to predetermine, commit to, revise or decide on interest rate decisions, and I have never agreed to do so,” he said.
“The Fed must maintain the status quo.”
In his opening remarks, Warsh said the central bank “must maintain the status quo.”
“The Fed’s independence is at greatest risk when it steps into fiscal and social policy for which it has no authority or expertise,” he added.
As USA TODAY previously reported, the Fed under the Powell administration and before that under Janet Yellen spent time and resources examining how issues of diversity and inclusion play out in both the economy and monetary policy. Warsh has spoken out against such efforts in the past.
But in response to a question later in the meeting, Warsh declined to say how big the Fed’s balance sheet should be, only saying it should be smaller in size and scope. The vastly expanded balance sheet (the Fed’s portfolio of bond holdings) is a legacy of the 2008 financial crisis, when Mr. Warsh was a member of the board.
The purchase of mortgage-backed securities was an attempt to strengthen the housing finance system, and the purchase of long-term bonds was a means to stimulate growth years after the financial crisis, when the economy was still in the doldrums.
“New inflation framework”
Warsh said there is “probably no issue more pressing” than the cost of living, linking Americans’ affordability concerns to mistakes made by the Federal Reserve at the start of the coronavirus pandemic that sent inflation to a 40-year high.
“Once inflation becomes entrenched in the economy, it becomes more expensive and harder to contain,” Warsh said. “The catastrophic policy errors that date back four or five years are a legacy that we are still dealing with today.”
In his view, fundamental policy reforms are needed to “solve the problem.”
“It’s true that inflation is less of an issue, but price volatility is also less severe than it was a few years ago, and I’m sure hard-working Americans are feeling that,” Warsh said. “I think it means a change of government in policy management. I think it means a new inflation framework.”
Senator: “Let’s stop this investigation.”
Mr. Tillis would likely need a vote to move forward with Mr. Warsh’s confirmation, but he has promised to delay the nomination until the Justice Department concludes its criminal investigation into Mr. Powell, and otherwise appears to support Mr. Warsh as a candidate.
“You will be independent, and you must be independent,” Tillis said, adding that he needed to create consensus among the other voting members of the Federal Open Market Committee. “The problem I have here is that some dreaming U.S. attorney general or assistant U.S. attorney thought it would be cute to put Chairman Powell under investigation just months before the post opened.”
Mr. Tillis criticized the investigation, saying there was a good reason for the price increase for the Fed’s headquarters renovation project and that if the Justice Department was to punish all federal employees who overspent on the project, it would need to “set aside an area roughly the size of Texas as a penal colony.”
“Let’s stop this investigation in support of your confirmation,” Tillis said.
“I will abide by any judgment of the court.”
Mr. Warsh declined to defend himself as the central bank faces lawsuits against Fed Governor Lisa Cook and Chairman Jerome Powell.
Asked by Sen. Angela Allsbrooks (D-Md.) whether he supported Cook’s tenure on the board, like Powell, Warsh said it would be inappropriate for him to express an opinion. Trump tried to fire Cook last year over allegations that he committed mortgage fraud. Cook has denied the allegations, and the Supreme Court heard oral arguments in the case in January but has not yet issued a ruling.
“If approved by this agency, it would follow the best of the Constitution, Supreme Court law, and Federal Reserve tradition,” Warsh said.
Mr. Albrooks went on to ask whether Mr. Warsh agreed with Mr. Warsh’s assertion that the investigation into Mr. Powell was an excuse for policy disagreements. Warsh reiterated that he would “comply with any decision of the court.”
“We certainly don’t have the ability to define whether the Vacancy Act applies to the Fed,” Warsh said in a follow-up to President Trump’s May 15 threat to fire Powell if he did not resign.
Mr. Powell said in March that Mr. Warsh would continue as chairman on an interim basis if he was not confirmed by mid-May.
