By Howard Schneider
WASHINGTON, April 21 (Reuters) – Federal Reserve chief nominee Kevin Warsh called for “regime change” at the U.S. central bank that would include a new “framework” for controlling inflation and a possible overhaul of how it communicates with the public about monetary policy.
In a confirmation hearing before the Senate Banking Committee that quickly hinted at major changes to come at a Warsh-led Fed, the 56-year-old lawyer and financier blamed the central bank for an inflation surge in the wake of the COVID-19 pandemic that continues to hurt U.S. households.
“The fatal policy errors going back four or five years” are a legacy that families are still working through, Warsh said, arguing the Fed needed “a regime change in the conduct of policy. It means a new and different inflation framework.”
That shakeup includes Fed communications that “compounded” the problem, the former Fed governor argued, in a signal he may want to change things like the central bank’s current use of quarterly economic and interest rate projections.
Warsh’s hearing quickly turned contentious.
He would not directly say that President Donald Trump lost the 2020 election – a statement of fact that Democratic Senator Elizabeth Warren said was a litmus test of Warsh’s independence from the Republican president who nominated him for the top Fed job – and also said he would stick with plans to sell more than $100 million in assets without detailing what they are or to whom they would be sold.
The proceeds, he said, would go into “plain vanilla” assets.
Warsh also was asked about comments Trump made shortly before the start of the hearing that he would be disappointed if Warsh did not get quick approval for rate cuts.
“Presidents tend to be for cutting rates,” Warsh said. “President Trump expresses it quite publicly.”
“Monetary policy independence is essential,” Warsh had said in a public statement delivered to members of the committee, who will recommend whether to confirm him to a seat on the Fed’s Board of Governors as well as a four-year term as head of the central bank.
“I do not believe the operational independence of monetary policy is particularly threatened when elected officials – presidents, senators, or members of the House (of Representatives) – state their views on interest rates,” said Warsh, a former Fed governor. “Congress tasked the Fed with the mission to ensure price stability, without excuse or equivocation, argument or anguish. Inflation is a choice, and the Fed must take responsibility for it. Low inflation is the Fed’s plot armor.”
Warsh has said rate cuts are warranted because technological changes unleashed by artificial intelligence will raise productivity, a view other central bankers say may be true over time but won’t necessarily make lowering rates appropriate in the short term.
The Fed has missed its 2% goal for more than five years, first due to the shock of the pandemic but more recently due to the influence of Trump administration tariffs and the high oil prices linked to the war in the Middle East, a potential issue for Republican lawmakers heading into the midterm elections in November.
TIMING OF VOTE UNCERTAIN
Trump has repeatedly clashed with Powell over monetary policy since naming him Fed chief in his first term in the White House. Powell’s tenure as head of the central bank formally ends on May 15, but he could conceivably remain longer in the office if Warsh’s confirmation is delayed.
At this point the timing of a committee recommendation or full Senate vote is uncertain.
Republican Senator Thom Tillis, a member of the committee, said during the hearing that Warsh’s confirmation would be delayed until the U.S. Justice Department drops a probe of Powell that the senator regards as frivolous and part of Trump’s effort to pressure the Fed into lowering rates or force Powell to resign.
Though the policy meeting next week could be Powell’s last as Fed chief, the standoff has raised the prospect that he will remain in the job even after his term formally expires.
U.S. Attorney for the District of Columbia Jeanine Pirro, an ally of Trump, does not seem poised to drop the Powell probe, and the president does not appear to be pushing her to do so – even though that stance means potentially living with the current central bank chief for months longer or touching off another legal battle by trying to appoint a temporary replacement from among the other six Fed governors.
In the absence of a confirmed successor for the top job, the central bank in the past has named its own “pro tem” Fed chief. Powell’s term as a central bank governor extends until 2028, meaning he could remain as a key policymaker even if Warsh is confirmed.
Trump also has said he still may fire Powell if he doesn’t vacate his governor’s position. Such a move would surely invite a legal challenge, as did the president’s attempt last summer to fire Fed Governor Lisa Cook.
It is an unprecedented situation for the U.S. central bank, where the handoff of authority has typically been collegial.
The Fed has a Washington-based board and staff, but also includes a dozen regional banks, tens of thousands of system-wide employees, and duties that range from setting interest rates for the entire country to managing the payments system, supervising and regulating banks, administering swap lines with foreign central banks, and conducting research on anything from cryptocurrencies to rural health.
Warsh, who served as a Fed governor from 2006 to 2011, has been deeply critical of Powell’s leadership, and the hearing provided an opportunity to explain in more detail what he plans to do differently.
“The Fed must stay in its lane,” Warsh said in his opening statement to the committee, echoing a standing conservative critique that the central bank’s work on issues like climate change or economic equity, or comments about fiscal spending, were out of bounds.
Republicans, including Tillis, generally have been supportive of Warsh’s nomination.
Democrats, meanwhile, say they have a healthy list of issues to raise, from Warsh’s role at the Fed during the era of big bank bailouts during the 2007-2009 financial crisis, to why his recent financial disclosures include a promise to divest some of his more than $100 million portfolio rather than more details about the assets he owns.
(Reporting by Howard Schneider, Ann Saphir and Michael S. Derby; Editing by Paul Simao)
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