Warsh: Fed independence is critical

Rachel Barber and Andrea Riquier

USA TODAY

Kevin Warsh, President Donald Trump’s nominee for chair of the Federal Reserve, faced questions on April 21 from the Senate Banking Committee, even as the shadow of the president himself dominated the hearings.

In a morning hearing, Warsh, a finance executive who previously served as a member of the Fed board, took questions from Republicans who support his nomination.

He also faced grilling from Democrats, led by Massachusetts Sen. Elizabeth Warren, on how independent he would be in the face of pressure from Trump, whose administration opened an investigation into current Fed Chair Jerome Powell. Many observers – and Powell himself – say the probe is politically motivated and an attempt to influence the board on interest rate decisions.

While Warsh has insisted that Fed independence is critical, he has also previously said he thinks the central bank has overstepped its mission in recent years.

Warren and other Democrats pounded Warsh, who is married to one of the heiresses of the Estée Lauder fortune, on his financial holdings, but much of the hearing focused on how he would shepherd the committee on decisions that impact the economy.

It’s unclear when senators will formally vote on Warsh’s confirmation. Because Sen. Thom Tillis, R-North Carolina, and Democrats oppose the Justice Department’s ongoing probe into Powell, whose term as Fed chair ends May 15, Warsh’s confirmation may hinge on that investigation’s resolution.

Warsh told the committee the central bank’s independence is 'critically important,' but that it has to be earned.

'It’s earned by delivering on promises,' Warsh said. 'As the Fed hasn’t delivered on those promises, we shouldn’t be surprised that we hear politics that are entering the room at the Fed.'

In a combative exchange, Warren asked Warsh to name one aspect of Trump’s economic agenda with which he disagreed. Warsh responded he disagreed with the president’s description of him as a nominee out of 'central casting.'

'Quite adorable, but you know, we need a Fed chair who is independent,' Warren said. 'If you can’t answer these questions, you don’t have the courage and you don’t have the independence.'

Later in the hearing, Warsh said that while he doesn’t take issue with the president expressing his preference for lower rates, Trump has never asked him to commit to any particular rate decision.

'The president never asked me to predetermine, commit, fix, decide on any interest rate decision in any of our discussions, nor would I ever agree to do so,' he said.

Fed ‘must stay in its lane’

In his opening remarks, Warsh said the central bank 'must stay in its lane.'

'Fed independence is placed at greatest risk when it strays into fiscal and social policies where it has neither authority nor expertise,' he added.

As USA TODAY has previously reported, the Fed under both Powell and, earlier, Janet Yellen spent time and resources examining how issues of diversity and inclusion played out both in the economy and via monetary policy. Warsh has spoken out against such efforts in the past.

But in response to a question later in the proceedings, Warsh declined to say how large the Fed’s balance sheet should be, only that 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 Warsh sat on the Fed’s Board of Governors.

Buying mortgage-backed securities was an attempt to shore up the housing finance system, and buying longer-term bonds a few years after the crisis was a means of trying to juice growth.

Warsh said there is 'probably no more pressing question' than the cost of living, and tied Americans’ affordability concerns to mistakes the Federal Reserve made following the start of the COVID-19 pandemic, when inflation hit a 40-year high.

'Once you let inflation take hold in the economy, it’s more expensive and harder to bring it down,' Warsh said. 'The fatal policy error going back four or five years is still a legacy that we’re dealing with.'

In his view, fundamental policy reforms will be required to 'fix it.'

Powell probe

Tillis, whose vote is likely needed to move Warsh’s confirmation along but who has pledged to stall the nomination until the Justice Department concludes its criminal probe into Powell, seemed to otherwise support Warsh.

'I think you’re going to be independent, you have to be,' Tillis said, adding he’d need to be to generate consensus among the Federal Open Market Committee’s other voting members. 'The problem that I have here is that we had some U.S. attorney general with a dream or assistant U.S. attorney thinking it would be cute to bring Chair Powell under an investigation just a few months before the position was going to open.'

Criticizing the investigation, Tillis said there are valid reasons behind the Fed headquarters renovation project’s increased price tag, and said if the DOJ punished every federal worker who had a project run over budget, it would need to 'reserve an area roughly the size of Texas for a penal colony.'

'Let’s get rid of this investigation, so I can support your confirmation,' Tillis said.

Warsh declined to defend Fed Governor Lisa Cook and Powell as legal cases against them loom over the bank.

When asked by Sen. Angela Alsobrooks, D-Maryland, whether he’d support Cook’s tenure on the Board of Governors, as Powell has done, Warsh said it would be inappropriate for him to weigh in. Trump attempted to fire Cook last year over allegations she committed mortgage fraud.

Cook has denied the allegations. The Supreme Court heard oral arguments in the case in January, but has yet to issue a ruling.

'If confirmed by this body, I will follow the Constitution, the Supreme Court law, and the best of the Fed’s tradition,' Warsh said.

Kevin Warsh, nominated to be the next chair of the Federal Reserve, tied Americans’ affordability concerns to mistakes the Fed made following the start of the COVID-19 pandemic.

Kevin Lamarque/REUTERS