Warsh Pledges Independence But Dodges Questions on Rates

Bloomberg Washington Correspondent, Tyler Kendall and Bloomberg US and Canada Economist, Stuart Paul react to comments from Fed Chair Nominee Kevin Warsh at his confirmation hearing before the Senate Banking Committee.

Kevin Warsh repeatedly pledged to act independently if he’s confirmed as the next Federal Reserve chair, rejecting Democratic concerns he would be a “sock puppet” for President Donald Trump, who continues to demand lower interest rates.

Warsh, in testimony before the Senate Banking Committee Tuesday, called for a slew of changes to the way the US central bank makes its decisions, including a new framework for dealing with persistent inflation and a new way of communicating with the public. But he provided few specifics and avoided answering questions about the near-term path of interest rates.

He also insisted the president never asked him to commit to any particular rate decision.

“The president nominated me for the position, and I’ll be an independent actor if confirmed as chairman of the Federal Reserve,” Warsh said, in response to questions from Democrats about how he planned to handle pressure from Trump.

In her opening remarks, the senior Democrat on the panel, Senator Elizabeth Warren said Warsh would be Trump’s “sock puppet” at the Fed.

Warsh’s ability to placate the White House while maintaining credibility on inflation with investors was seen as a key test for him heading into the hearing. Tuesday morning, Trump said he’d be disappointed if Warsh didn’t cut rates as soon as he took office. In her opening remarks, the senior Democrat on the panel, Senator Elizabeth Warren said Warsh would be Trump’s “sock puppet” at the Fed.

“Kevin Warsh hit all the right notes to reassure his supporters on the committee that he will push forward his idea of regime change at the Fed,” Joseph Brusuelas, chief economist at RSM. “He said nothing that will disrupt his path to being approved, if it makes it to the floor of the Senate.”

Warsh’s indication that the Fed should change a number of its current practices and even how it approaches policy decisions echo what he’s detailed in op-eds and speeches in the years since he left his position as a Fed governor in 2011. Some changes, such as the frequency of the post-meeting press conferences, can be made by the Fed chief alone. Others would take broad cooperation from the central bank’s 18 other policymakers.

Those other officials frequently speak publicly — something Warsh has said he disapproves of, but may not be able to change. Some larger moves, such as modifying or abandoning the quarterly economic forecasts and interest-rate projections that policymakers publish, may enjoy support among others.

“I do take him at his word and I would expect that will occur should he take the helm,” Brusuelas said of changes to Fed communication policies.

Key Test

Warsh’s ability to placate the White House while maintaining credibility on inflation with investors was seen as a key test for him heading into the hearing. Tuesday morning, Trump said he’d be disappointed if Warsh didn’t cut rates as soon as he took office.

Early in his testimony, Warsh blamed the Fed for allowing inflation to surge following the Covid-19 pandemic, and said quickly rising prices remain a problem for Americans. In response, he said the central bank needed a new framework for dealing with persistent price pressures, without offering more specifics.

Follow the reaction in real time on Bloomberg’s TOPLive blog

“While it’s true that inflation is less problematic, meaning 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 different, new inflation framework.”

Warsh didn’t say what that meant for interest rates. Pressed by Democrat Chris Van Hollen whether he agreed with Trump’s call for the Fed to lower rates to around 1% this year, Warsh dodged.

“Unlike many of my colleagues past and present, I don’t believe in forward guidance,” he said.

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