Warsh to Focus on Fed's Monetary Independence in Confirmation Hearing

Bloomberg's Stuart Paul said that a preview of prepared remarks from Trump's pick for Fed Chair Kevin Warsh show that he will focus mainly on the Fed's monetary independence in his confirmation hearing Tuesday. Paul described Warsh's view that the fed is responsible for all inflation, even if it is driven up by external forces, as 'shockingly hawkish' but explained that it could stem from the pressure he will face from the White House to deliver rate cuts.

Kevin Warsh has for years accused the Federal Reserve of losing its way and said it’s in desperate need of “regime change.”

Now, as President Donald Trump’s pick to be the next Fed leader, Warsh will have the opportunity to map out his plans to remold the world’s most important central bank when he testifies Tuesday before the Senate Banking Committee.

Warsh, in a nod to concerns about the Fed’s future, will vow to protect the central bank’s independence in his prepared remarks, according to a copy viewed by Bloomberg.

“I believe that monetary policy independence is earned — and better policy decisions crafted — by steering clear of distractions,” Warsh says in the remarks, while promising to keep the Fed focused on its mandate and operational mission. “Fed independence is placed at greatest risk when it strays into fiscal and social policies where it has neither authority nor expertise.”

Warsh’s testimony highlights the fine line he must walk during the hearing between President Donald Trump’s demands for lower rates and reassuring investors that he will defend the Fed’s autonomy in rate-setting. His hearing comes against the most politically charged backdrop for the central bank in decades. Trump’s scathing criticisms of Chair Jerome Powell, his attempt to fire a Fed governor and his Justice Department’s criminal investigation into Powell and the central bank have all fueled worries that the Fed’s independence is under threat.

Kevin Warsh

“This has become an unusually high-stakes confirmation hearing,” said Sarah Binder, a professor of political science at George Washington University who has studied Fed independence. “President Trump and his supporters will expect Warsh to commit to lowering interest rates, no matter what. But senators from both parties will want to hear Warsh commit to protecting Fed independence. That’s where the balancing act comes in.”

Read More: Wells CEO Scharf Calls Fed Independence ‘Critically Important’

Also hanging over the hearing is huge uncertainty over when Warsh may even get in the job.

A key Republican voter on the committee, Senator Thom Tillis of North Carolina, has vowed not to approve any appointment until the DOJ’s probe ends, effectively blocking Warsh’s path to confirmation and raising doubts about whether he’ll be in place by the time Powell’s term as chair expires on May 15.

For his part, Trump has no plans to back down on the probe, according to a White House official. Trump is also continuing to weigh the possibility of trying to remove Powell as chair if he stays in an acting capacity after his term ends, the person said.

That starting point leaves Warsh having to pull off two challenges simultaneously: Demonstrate some level of loyalty to Trump’s demands on monetary policy, while reassuring anxious investors that he’s committed to maintaining control over inflation.

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