Warsh's Nomination Was the Easy Part: RenMac's Dutta

Renaissance Macro Research Head of Economic Research Neil Dutta joins Bloomberg Businessweek Daily to discuss his call that Federal Reserve Chairman nominee Kevin Warsh faces several uphill battles before his confirmation proceedings even begin. Dutta explains his findings that Warsh "has been hawkish throughout his entire public career, up until about the six months during which he's been interviewing for the Fed job," and also discusses how the Fed "being bigger than one person" could limit market anxiety. Dutta also says the gridlock around Senator Thom Tillis delaying any Fed confirmation could create more complications for Warsh. Dutta speaks with Carol Massar and Tim Stenovec.

In the summer of 2002, 32-year-old Kevin Warsh found himself at the center of a political fight over some of the era’s most complex financial legislation.

Warsh was just a junior White House staffer. But at the climactic moment of closed-door negotiations on Capitol Hill, he was the one playing point man for the Bush administration – and under forensic cross-examination by Democratic Senator Paul Sarbanes, co-author of the bill to clean up corporate reporting after the Enron scandal.

“Every single person was leaning in, in the aggressive position,” said Marc Sumerlin, then Warsh’s senior colleague on the National Economic Council. “And I look at him and he’s just the only one whose shoulder blades were touching the back of the chair, just calmly answering every single question.”

Differences were ironed out and the Sarbanes-Oxley Act became law. Within a few years, Warsh was rewarded with a seat as a Federal Reserve governor. And now he’s getting sent back to the central bank by President Donald Trump -– to be its boss.

He’s returning to the Fed with an agenda that will test all those smooth-it-over skills. Trump wants lower interest rates and the formerly hawkish Warsh now agrees. To deliver them, he will need to get his fellow policymakers on board. It’s the kind of task he typically excels at, people who know him say. But in this case there’s a catch: Warsh has spent much of his time away from the Fed heaping abuse on it.

“He’s made this more difficult with his persistent criticism that the central bank needs ‘regime change’ and that he might need to ‘break some heads,’” former New York Fed President William Dudley wrote in a Bloomberg Opinion column. “To truly wield power, he’ll have to earn respect.”

Warsh, contacted through the Hoover Institution, didn’t respond to a request for comment.

Warsh has called for a comprehensive overhaul of the Fed, covering areas from its involvement in issues like climate change to how often its policymakers speak and the economic models they rely on. He’s reserved particular scorn for its $6.6 trillion balance sheet, and says shrinking it will open the way for cheaper borrowing on Main Street.

It adds up to a revamp that in some ways would mirror what Trump has sought to do across the federal government. And this makes his nomination an unusual one by recent standards. Incomers have tended to defer to the Fed status quo — and they usually got confirmed with backing from both parties in the Senate.

“Warsh is very much a departure,” Nobel prize winning economist Paul Krugman told Bloomberg Television on Friday. “In the past, the Fed chair has always been someone very highly regarded as an analyst, as a judge, somebody with broad bipartisan support. That’s not what’s happening here. He’s very much a partisan.”

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