Warsh at the Fed: What Changes, What Does Not

The Senate Banking Committee is scheduled to vote Wednesday on Kevin Warsh’s nomination to lead the Federal Reserve, a vote that was blocked for weeks by Senator Thom Tillis of North Carolina until the Department of Justice dropped its criminal investigation into Jerome Powell last Friday. With that obstacle removed, Warsh is expected to be confirmed in time to chair the Fed when Powell’s term expires on May 15. What Warsh has telegraphed about his priorities matters. His confirmation hearing before the Senate Banking Committee on April 21 made several things clear. He favors abandoning flexible average inflation targeting, the framework the Fed adopted in 2020 that allows inflation to temporarily exceed 2%, in favor of a strict 2% target. He wants to reduce the Fed’s reliance on quantitative easing and shrink the balance sheet, which has expanded enormously since 2008. He also signaled skepticism about forward guidance, including the dot plot, suggesting it may not survive his tenure. “The Fed must stay in its lane,” he told senators, arguing that Fed independence is most threatened when the central bank strays into fiscal and social policy. The question of independence is pointed. Trump has demanded rate cuts publicly and repeatedly. Warsh told senators he never promised the White House he would cut rates and pledged to be “an independent actor.” But he also said he does not believe presidential commentary on interest rates threatens the Fed’s operational independence, a view that some Fed watchers read as leaving substantial political space. The Council on Foreign Relations, in its analysis of the hearing, noted that Warsh also expressed an interest in studying how AI productivity gains might justify lower rates than would otherwise be warranted, which could provide an intellectual rationale for easing if the data eventually allows it.