The Single Biggest Question Hanging Over Kevin Warsh's Fed

Friends,

The Senate just confirmed Kevin Warsh to become the next chair of the Federal Reserve on a 54-45 vote.

This marks a new chapter in the history of an institution that depends for its credibility on political independence. That independence is important to you and everyone else who want prices to remain stable and avoid inflation.

Trump has repeatedly attacked the Fed and its former chairman, Jerome Powell (not incidentally, a Trump appointee) for not lowering interest rates as quickly as Trump wants. Presumably, Trump wants lower interest rates because he figures that a “hot” economy is good for Republicans going into the 2026 midterms and perhaps even the 2028 general election, even if it means faster inflation.

Trump launched a trumped-up (pardon me) criminal investigation of Powell based on alleged cost overruns for refurbishing the Fed building, and another against Fed member Lisa Cook based on alleged mortgage fraud. Neither of these individuals has left the Fed. (Powell’s term as chair ends May 15 but he has announced he’ll fill the remainder of his term as a Fed governor, which runs until January 31, 2028. He says Trump’s pressure campaign against the central bank left him no choice but to stay on. The case against Cook has been taken up by the Supreme Court, which is expected to issue an opinion before its current term ends in July.)

Senator Thom Tillis, Republican of North Carolina and a member of the Senate Banking Committee, blocked Warsh’s nomination until Trump dropped his legal threats against Powell. (Tillis thereby earns one of my Joseph N. Welch Awards for courage in the face of Trump’s tyranny.)

The big question now is whether Warsh will do Trump’s bidding and advocate lower interest rates even in the face of rising inflation — a move that would worsen the inflation even if it gives the economy (along with Trump and the Republicans) a temporary boost. (All but one Democrat in the Senate voted against confirming Warsh, reflecting concerns about his willingness to maintain the Fed’s political independence. During his confirmation hearing, Senate Democrats derided Warsh as Trump’s “sock puppet.”)

Why Fed independence is so important

The reason why the Fed, like most nations’ central banks, is supposed to be independent of politics is so people who are buying and selling financial assets don’t base their transactions on Trump’s or any other political leader’s desire for a booming economy in the short run (that is, until the next election) even at the risk of inflation.

Otherwise, inflation could easily get out of control. As William McChesney Martin Jr., the longest-serving chairman of the Federal Reserve, famously put it, the role of the Fed is “to take away the punch bowl just as the party gets going.”

Martin’s “party” is an expanding economy with growing inflationary pressures, and the “punch bowl” is low interest rates and easy credit that fuel these growing pressures. As the designated chaperone, the Fed has to raise interest rates to prevent the economy from overheating, even if doing so harms a president’s political prospects.

I was in the Carter administration when Fed Chair Paul Volcker decided to “break the back” of inflation by raising interest rates so high that he put the economy into a recession and, arguably, caused voters to boot Carter out of office in 1980.

I was in the Clinton administration when Fed Chair Alan Greenspan threatened to raise interest rates (which might also have led to a recession and cause voters to boot Clinton out of office in 1996) unless Clinton reduced the federal budget deficit — which Clinton did (over my strenuous but failed objections).

Can Warsh succeed?

Warsh’s success on the job depends on the perceptions of millions of financial traders, who presumably will be looking for any hint that he’s soft on inflation.

Ironically, Trump’s loud insistence on lower interest rates, coupled with rising inflation due to Trump’s war in Iran and his tariffs, all make Warsh’s job far more difficult.

I don’t expect the Fed to lower interest rates before the end of the year, regardless. Warsh’s first meeting as chair will be June 16-17.

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