During Kevin Warsh’s tenure as a governor at the Federal Reserve from 2006 to 2011, his voting record, and his public comments since then, have shown a clear predilection for tight monetary policy.
That track record will be the focus of his confirmation hearing before the Senate Banking Committee on Tuesday to succeed Jerome Powell as the next chair of the Fed.
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Warsh has made a career of favoring restrictive monetary policy—unless, of course, his normative preferences were in alignment with those who control the executive branch. At those times, he has tended to favor easy money.
It is a short walk between hawk and hack, and Warsh will have to be mindful of that at his hearing when he addresses pointed questions about the central bank’s independence, or about whether he would fire regional bank presidents if they do not agree with his or the administration’s rate preferences. His views on the timing and efficacy of rate cuts will also be the subject of questioning.
Warsh will not only have to strike a delicate balance before lawmakers on these issues, but he will also have to square the circle between his newfound dovishness on rates and his instinctual hawkishness around the Fed balance sheet.
After all, his audience will also include an unforgiving market that is thinking about what a dissent from a potential Fed chair looks like and how to price that in.
But in the end, he will have to answer a fundamental question: Will he be the head of an independent central bank that sets policy in the best interests of the economy, or does he work for the executive branch?
Expect plenty of obfuscation during the hearing. With a midterm election approaching, much of the hearing will be dedicated to grandstanding by political actors.
When that posturing is not the case, there should be substantive questions around the following:
- Why are rate cuts appropriate for the economy?
- What are risks around the outlook linked to inflation caused by tariffs and the war in Iran?
- Explain how artificial intelligence in its current form is a justification for rate cuts?
- What are his plans for regime change at the Fed?
- What is the target for a reduced balance sheet?
- Over what period could that reduction in assets be achieved?
- Are his ideas on reducing the balance sheet compatible with the evolution of the market since he last served at the Fed?
- Would he plan to limit speeches by other Fed members?
- Does he favor removing the “dot plot” interest rate forecast?
- Would Warsh support the use of Fed swap lines to provide a financial lifeline to the United Arab Emirates because of any potential liquidity crisis caused by the war in Iran?
All of this discussion, though, may end up being a grand exercise in political theater given the stated intention by Senator Thom Tillis, Republican of North Carolina, not to let Warsh’s appointment out of committee until the Department of Justice drops its investigation into Powell over the Fed’s renovation of its headquarters.
Should Tillis follow through on his promise, then the appointment will not proceed.
Of course, the grand irony of all this is that should the Warsh appointment not advance, the Fed’s vice chair, Philip Jefferson, will become the acting head of the central bank while the Federal Open Market Committee has already voted for Powell to continue as head of the rate setting committee when his term expires on May 15.
