Kevin Warsh Hearing: Defending Fed Independence

At his Federal Reserve chair nomination hearing, Kevin Warsh emphasized the importance of maintaining monetary policy independence, stating that he intends to pursue broad reforms at the Fed and would never act at the direction of President Donald Trump.

In his prepared opening remarks, Warsh pledged to “ensure that monetary policy implementation remains strictly independent,” while noting that “the Fed’s independence ultimately depends on itself.” He argued that the FED must remain within its mandate, warning that if it extends into fiscal or social policy areas beyond its statutory authority, “its independence would face the greatest risk.”

Warsh stated: “Monetary policy independence is essential. When elected officials—whether the president, senators, or members of Congress—express views on interest rates, I do not believe that poses a significant threat to the independence of monetary policy operations.”

He reiterated that the Fed should respect its institutional boundaries and declined to comment on Trump’s attempt to dismiss Fed Governor Lisa Cook, citing the ongoing legal case.

Reform Agenda: Models, Communication, and Balance Sheet

Nick Timiraos, often referred to as the “Fed’s unofficial spokesperson,” noted that Warsh largely reiterated views he has emphasized in recent years while outlining his reform agenda. These include:

• Replacing the Fed’s inflation forecasting models
• Reducing the frequency of public communication
• Gradually shrinking the Fed’s $6.7 trillion balance sheet

Timiraos argued that the key question for Warsh’s confirmation is not whether he can secure enough votes, but rather who will compromise first on the issue of a criminal investigation into Fed Chair Jerome Powell—Trump or Republican Senator Thom Tillis.

During the two-and-a-half-hour hearing, several points stood out: Warsh pledged to defend Fed independence, yet carefully avoided the most difficult tests. He declined to comment on Trump’s attempt to fire Governor Cook and on investigations into the Fed headquarters’ expensive renovation, citing ongoing legal proceedings.

📉 Policy Stance: No Call for Cuts, But No Pushback Either

Timiraos also noted that Warsh did not explicitly call for rate cuts, but neither did he weaken the case for them.

He argued that the Fed should focus on core inflation and referenced measures such as trimmed mean inflation, which exclude outliers. These indicators suggest that inflation is closer to the Fed’s 2% target.

Warsh also pushed back against the view held by several Fed officials that tariffs have driven recent inflation data higher. However, he stopped short of declaring victory over inflation, stating:

“Inflation dynamics are improving, but more work remains to be done.”

⚖️ Political Pressure: Trump Relationship Under Scrutiny

During the Q&A session, lawmakers repeatedly questioned Warsh about his relationship with Trump.

Senator John Kennedy asked whether Warsh would act as Trump’s “puppet.” Warsh responded: “Absolutely not.”

Senator Ruben Gallego cited a Wall Street Journal report claiming that Trump had pressured Warsh to commit to cutting rates if confirmed, suggesting that either Trump or Warsh was not telling the truth.

Warsh disputed the report, stating that the journalist should “find better sources or adhere to stricter journalistic standards.” He added: “I stand by every word I say. The president has never asked me for such a commitment, and I would never make one.”

Senator Jack Reed asked whether Warsh would yield to Trump’s demand for rate cuts, noting that Trump had said he would not appoint a Fed chair who opposes cuts. Warsh replied that he had made no such commitments.

Senator Elizabeth Warren described Warsh as “a deeply unsuitable” candidate for Fed chair. She repeatedly asked whether Trump lost the 2020 election. Warsh refused to answer, stating:

“If confirmed, we will work to keep politics out of the Federal Reserve.”

Warsh also disclosed that he has been working with the Office of Government Ethics (OGE) to divest personal financial assets and has agreed to “sell all financial holdings” upon confirmation.

🔧 Toward Structural Reform of the Fed

Warsh signaled that, if confirmed, he would pursue sweeping reforms at the Federal Reserve. These include changes to the policy implementation framework and the creation of a new inflation framework.

On communication, when asked how many policy meetings he would hold annually, Warsh did not give a direct answer. He noted that the Federal Reserve Act requires at least four meetings per year, but said this is clearly insufficient:

“Four meetings are obviously not enough, so holding more than that is appropriate.”

Regarding post-meeting press conferences, Warsh did not provide a clear answer, stating:

“If we hold press conferences, I believe it is our duty to listen to the concerns and questions of journalists.”

However, he reiterated his criticism that Fed officials speak too frequently.

🤖 AI and Rate Cuts: Productivity vs Inflation Debate

Senator Chris Van Hollen expressed concern about Warsh’s shifting stance on rate cuts, suggesting that his position appears to change with political convenience rather than sound economic judgment. He questioned why Warsh would lean toward rate cuts while inflation remains elevated.

Warsh responded that if potential economic growth accelerates—particularly due to artificial intelligence—then inflation may become less concerning, thereby creating room for rate cuts.

Media noted that while Warsh did not explicitly mention “productivity,” it was central to his argument. However, many economists remain skeptical, arguing that AI may actually increase inflation in the short term.

Warsh elaborated that AI could have a dual impact:

• In the short term, heavy investment in AI infrastructure could boost demand and push inflation higher
• In the long term, AI could enhance economic productivity, enabling faster growth without triggering inflation

When asked about AI, Warsh remarked: “We are at one of the most disruptive moments in modern economic history for the United States and the world.”

Senator John Kennedy expressed skepticism, suggesting that claims about AI-driven productivity gains are merely “hype” created to promote upcoming IPOs.

⚖️ Fed and Inequality: “K-Shaped Economy” Critique

Warsh stated during the hearing that the Federal Reserve bears responsibility for rising wealth inequality—the so-called “K-shaped economy.”

Responding to Senator Raphael Warnock, Warsh said:

“I believe the Fed bears responsibility for the divergence between those who own financial assets and those who do not. The Fed’s balance sheet has expanded from $800 billion when I joined in 2006 to an order of magnitude larger today.”

He added: “If the Fed had maintained a smaller balance sheet, I believe interest rates could have been lower, inflation outcomes better, and the economy stronger.”

Warsh declined to specify an appropriate size for the Fed’s balance sheet but emphasized that it should be reduced and that the Fed should not continue holding long-term Treasury securities.

₿ Cryptocurrency: Integration, Not Centralization

Senator Cynthia Lummis asked whether crypto assets should be integrated into the financial system to expand consumer choice and protection.

Warsh responded affirmatively:

“Digital assets are already deeply embedded in the fabric of our financial system, so my answer is yes.”

However, he opposed the idea of a central bank digital currency (CBDC), stating that the Federal Reserve lacks the authority to issue one and that doing so would be a poor policy choice.