Warsh says Fed independence 'has to be earned' at confirmation hearing

Kevin Warsh, President Donald Trump’s nominee for chair of the Federal Reserve, faced questions Tuesday, 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 charges are politically motivated, and an attempt to influence the board on interest rate decisions.

Warsh has previously said that he thinks the central bank has overstepped its mission in recent years. And while he has also insisted that Fed independence is critical, he said Tuesday he thinks it needs to be earned. Since the Fed hasn’t delivered on many of its promises, he said in response to one question, politicians are seeking to influence its actions.

Warren and other Democrats pounded Warsh, who is married to one of the heiresses of the Estée Lauder company 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. However, 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.

'Independence has to be earned'

Warsh told the committee the central bank’s independence is "critically important," but that is "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 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.

'The Fed must stay in its lane'

In his opening remarks, Warsh said that 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 not 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 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 financial crisis, when the economy was still in the doldrums, was a means of trying to juice growth.

A 'new inflation framework'

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."

"While it's true that inflation is less problematic, the rate of change in prices is less severe than it was some years ago, hard working Americans are no doubt feeling it," Warsh said. "I think that means a regime change in the conduct of policy. I think that means a new inflation framework."

Senator: 'Let's get rid of this investigation'

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 as a candidate.

"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 a renovation project at the Fed's headquarters' 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.

'I'd abide by any judgement of the courts'

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

Alsobrooks continued, asking whether Warsh agreed with Powell's assertion the investigation into him was a pretext for policy disagreements. Warsh again said he'd "abide by any judgement of the courts."

Responding to a follow-up on Trump's threats to fire Powell if he doesn't step aside as chair on May 15, Warsh said "I'm certainly not capable of defining whether the Vacancy Act applies to the Federal Reserve or not."

Powell in March said he'd continue to serve as chair on a temporary basis if Warsh isn't confirmed by mid-May.