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What Could the Fed Look Like Under Kevin Warsh? · C-Suite Perspectives

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  Welcome to C-Suite Perspectives, a signature series by The Conference Board.
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  I'm Yelena Shulyatyeva, senior US economist at the Economy,
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  Strategy & Finance Center, and a guest host of today's episode.
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  Joining me today is John Gardner.
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  He's the head of public policy and research at the Committee for
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  Economic Development, the public policy center of The Conference Board.
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  In today's conversation, we'll discuss what the nomination of Kevin Warsh
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  to be the next Fed chair means for economic outlook, monetary policy,
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  and FOMC structure, as well as the intricacies of the confirmation process.
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  We'll start things off with John asking me about the economy and interest
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  rates, and then we'll turn the tables.
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  Elena, thanks very much.
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  Warsh used to be known as someone who strongly focused on fighting
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  inflation, back when he was a governor from 2006 to 2011.
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  They were a resolute inflation hawk.
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  But now he seems more open to cutting interest rates, even though inflation
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  isn't back to that 2% target yet.
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  In simple terms, what changed?
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  Warsh believes the economy has changed and in a meaningful way.
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  He thinks businesses are becoming more productive, which means they can produce
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  more without raising prices as much.
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  So things like new technology, AI, and changes in how companies operate after the
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  pandemic helping keep inflation in check, even as the economy continues to grow.
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  At the same time, wage growth has cooled without a big jump in unemployment.
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  That combination, steady growth with slowing inflation—which economists
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  actually call disinflation or prices rising more slowly—that
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  could create room to lower interest rates without crashing the economy.
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  So in a sense, the neutral rate could be lower, in his view, we think.
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  So Warsh isn't giving up on fighting inflation.
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  He just sees the risks differently now.
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  So his reaction function could be different from what it used
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  to be back in the day when he was a Federal Reserve governor.
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  Thanks.
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  So if Warsh does become Fed chair, does this mean that the Fed will
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  now lean more towards cutting rates?
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  And is this a short-term move or rather, a longer-term change
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  in how the Fed would think?
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  I think I would tend to say this would likely be a short-term
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  adjustment, not a permanent shift.
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  So Warsh would still see controlling inflation as the Fed's top priority,
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  but he appears to believe that interest rates don't need to stay as high right
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  now because productivity improvements are helping keep inflation under control.
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  So that would allow for some rate cuts without losing discipline.
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  Yeah, but since Warsh has such a strong reputation for being tough on
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  inflation, how might the markets react if he ends up supporting cutting rates?
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  Could that cause confusion or volatility?
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  There always could be some confusion, and that could be some initial uncertainty,
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  absolutely, until at least Warsh clearly explains what he's thinking.
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  And we haven't heard from him yet, at least not in the new capacity.
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  But this tough reputation could actually help.
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  If someone is known for being cautious about inflation, that
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  could support lower rates.
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  Markets may take that as a strong signal that inflation pressures have truly eased.
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  In that sense, his credibility could calm the markets rather than unsettle them.
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  So then, what's your forecast for growth inflation and for
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  policy rates under a new chair?
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  I don't think it's any different from what we were expecting before the nomination.
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  We are still expecting slower growth, based on the affordability concerns, the
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  pass-through of tariffs into inflation.
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  But eventually, we should see lower inflation going forward, like in
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  the second half of the year after tariffs pass-through is done.
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  I think we would still see interest rate cuts, but potentially those two cuts that
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  we expected in 2026 would come closer to the end of the year under the new
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  chair, rather than under Chair Powell.
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  So then, what does the nomination also mean for the structure of the
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  FOMC and how the Fed makes decisions?
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  I don't think the new chair would change the Fed's formal structure that much.
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  But you, John, may have some different thoughts about it.
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  It could change how decisions are made in practice.
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  I think Warsh has been very critical of the Fed for being slow to adjust policy.
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  And he actually called for a "regime change," and I quote.
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  That suggests a stronger, more heads-on chair, probably, who sets clear priorities
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  and drives decisions more forcefully.
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  So that could also mean less emphasis on building broad consensus and
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  more direction coming from the top.
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  So over time, that may reduce the influence of regional Fed presidents
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  and shift more power toward the chair, even though the basic
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  structure of the Fed stays the same.
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  I would like to mention one thing, actually, it's specific to Kevin Warsh.
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  He has a history of speaking directly with business leaders
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  and bank CEOs to get a real-time sense of how the economy is doing.
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  That was his practice during the Great Financial Crisis.
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  So, for example, he checked in frequently to understand conditions before they
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  showed up in the data, which could be very useful in the current environment
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  when we get government shutdowns and constant economic data delays.
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  So that could be a useful thing to do.
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  So as long as those conversations compliment the data and include a
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  broad range of voices, this kind of outreach can strengthen decision-making.
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  We're going to take a short break and be right back with more of our conversation.
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  Welcome back to C-Suite Perspectives.
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  I'm Yelena Shulyatyeva, senior US economist at the Economy,
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  Strategy & Finance Center.
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  I'm joined by John Gardner.
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  He's the head of public policy and research at the Committee for
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  Economic Development, the public policy center of The Conference Board.
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  We are going to turn the tables, and I will ask John some questions
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  about the confirmation process.
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  So John, Sen. Thom Tillis has said he will not confirm any Fed Chair
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  nominee until the controversy surrounding Chair Powell is resolved.
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  How significant is that stance for the confirmation time?
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  It's a great question.
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  Let me just start by giving a little bit of background on Warsh for those
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  who may not be familiar with him.
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  He's very highly educated and a highly regarded economist.
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  He has a bachelor's degree from Stanford, a JD from Harvard Law School,
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  also took courses at Harvard Business School and the MIT Sloan School.
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  He served on the National Economic Council for President George W. Bush,
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  who also then appointed him as the youngest governor of the Fed in history,
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  where he then served for five years, including throughout the financial crisis.
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  So under normal circumstances, I think people would say, well, you know, here's
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  somebody who really does have the kind of experience for the confirmation.
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  But as you note, Sen. Thom Tillis, who is a Republican from North Carolina, has said
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  that he will only allow the nomination to proceed when the criminal investigation
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  of Chair Powell that the Justice Department announced is finished with an
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  assessment of either guilt or innocence.
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  Or, as Tillis said, "they can withdraw it because they don't have sufficient
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  basis for a prosecution," unquote, which certainly seems to be Tillis's own
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  perspective here about the investigation.
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  Which is, of course, consistent with what Chair Powell himself had
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  said, that he thought this was about pressure to cut interest rates.
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  In fact, Tillis doesn't really have any objections that I have been
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  able to find to Warsh on policy.
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  And he wrote to the president, saying that it was a quote, "great pick," unquote.
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  So the issue really is the investigation into Powell.
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  Now, about the confirmation.
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  The nomination has to go first through the Senate Banking Committee,
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  which would hold a hearing on it.
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  Tim Scott, Republican of South Carolina, is the chair of that.
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  The ranking member is Elizabeth Warren, a Democrat from Massachusetts.
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  13 Republicans, 11 Democrats.
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  So assuming that the votes fall along partisan lines, and Tillis refuses
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  to proceed with the nomination, then either they delay the hearing entirely,
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  which I don't think they would do.
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  Or second, if Tillis votes "no," it would be 12 to 12, and the committee would be
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  deadlocked, which also may seem unlikely.
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  So there are a variety of options, but right now, the
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  nomination could be blocked.
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  That's one option, particularly if Tillis puts a hold on it in the full Senate.
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  Another option is that Tillis could face pressure, with 12 Republicans
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  supporting and only 11 Democrats opposed, to agree to have the
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  nomination sent from the committee to the floor without a recommendation.
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  And there is precedent for this, although it's unusual.
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  Right now, Senator Thune says that that would be difficult, but things can change.
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  Tillis could also be supported by a senator not on the committee,
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  who is Sen. Lisa Murkowski of Alaska, Republican of Alaska.
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  But in practice, it would take four Republicans to defeat the
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  nomination in the full Senate if all the Democrats vote no.
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  Right now, that seems unlikely, so I would suspect an eventual confirmation.
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  But the timing and the path is a little uncertain.
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  That is very interesting, indeed.
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  Thank you.
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  So, my other question is, Warsh has called for a regime change at
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  the Fed that would involve breaking some heads, and that was a quote.
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  How might that rhetoric play in a Senate confirmation hearing?
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  This is strong rhetoric to be sure, but I do think that any criticism of that would
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  break down pretty much on partisan lines.
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  I think much of the underlying issue here involves not only questions
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  over the Fed's headcount, where there have been suggestions that the
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  Fed simply employs too many people.
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  But really more fundamentally, over the future of the Fed's
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  $6.6 trillion balance sheet.
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  Warsh has been pretty clear that he thinks the Fed's balance sheet is too high.
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  And while he had initially supported the QE effort early in his term as a governor,
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  he actually resigned from the board in 2011 because of concerns over this policy.
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  And he's criticized what he terms, quote, "monetary dominance,"
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  or the dominant feature of the central bank in the economy.
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  Last July, in an interview on Fox Business, he kind of gave some clues to
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  his future thinking on this by saying, quote, "My simple version of this is, run
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  the printing press a little bit less, let the balance sheet come down, let Secretary
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  Bessent handle the fiscal accounts. And in so doing, you can have materially
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  lower interest rates," end quote.
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  Which, of course, gets to what you were discussing earlier about the
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  potential future on interest rate policy.
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  So I suspect these questions will be prominent in a confirmation hearing, but
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  I'm not sure they will change any votes.
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  I see.
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  OK.
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  Could calls for a sharp internal shift at the Fed raise concerns
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  among lawmakers about institutional independence or governance?
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  Yes, and I think, again, that this would largely depend on partisan views.
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  And I think it's important to recall here that in an executive order,
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  last February, the president ended the independence of the so-called
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  independent regulatory agencies like the Securities and Exchange Commission
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  or the Federal Trade Commission.
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  And some of that is being litigated right now, particularly regarding
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  the president's appointment process.
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  The case there is called Trump v. Slaughter, where Rebecca Slaughter,
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  having been a commissioner of the Federal Trade Commission.
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  But it's also important to note that in that executive order, he included
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  the regulatory functions of the board of governors of the Federal
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  Reserve, and exempted only the FOMC and the conduct of monetary policy.
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  But he did so as an exemption, rather than something that was of right or
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  something required by the statute.
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  And this whole question of the legal and practical independence of the Fed is, of
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  course, an issue in the case that just went to the Supreme Court, whether the
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  president can fire Governor Lisa Cook.
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  And we're waiting for the court's decision on that.
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  More broadly, Warsh has also spoken about the need for a new Federal
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  Reserve-Treasury agreement to replace the agreement from 1951 that really
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  serves as one of the guarantees of the independence of the Central Bank.
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  It's unclear what that might entail.
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  But again, in part some of this comes back to the question
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  of the Fed's balance sheet.
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  In an interview with CNBC last July, Warsh said that the
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  relationship needed to be redefined.
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  Quote, "We need a new Treasury-Fed accord like we did in 1951 after
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  another period where we built up our nation's debt, and we were stuck with
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  a central bank that was working across purposes with the Treasury," end quote.
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  And he said that part of the goal of the new agreement would be, quote,
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  "The Fed Chair and the Treasury Secretary can describe to markets
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  plainly and with deliberation, 'This is our objective for the size of
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  the Fed's balance sheet,'" unquote.
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  So again, I do see this, not only in the context of the balance sheet, but also in
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  the context of that executive order and whether the regulatory and other functions
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  of the Fed do, in fact, in some sense, fall under the executive branch or not.
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  So, a lot of questions here, and really more questions than answers at this point.
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  OK.
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  Well, that is very interesting, indeed.
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  If confirmation is delayed, what mechanisms are in place to ensure
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  continuity at the Fed, and are those likely to reassure the markets?
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  I don't want to speculate on the market, but just to get the dates on the record
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  here, Chairman Powell's term ends in May, I think it's May 15, and he also has a
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  right to stay as a governor until the expiration of his full term as governor,
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  which is separate from his term as chair.
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  He was actually confirmed for each role.
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  His term as a governor expires January 31, 2028.
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  It would be unusual for a chair to stay as a governor, but it is his right.
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  And it could happen.
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  And I think it is, in fact, a possibility, particularly given with
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  what we saw about Governor Cook.
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  Most immediately, if Warsh is not confirmed by May 15, I suspect that
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  Vice Chair Philip Jefferson would simply serve in an acting capacity.
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  And here I would just note that Jefferson was confirmed by the Banking
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  Committee and by the full Senate, both as a governor and as a vice chair,
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  by strong bipartisan majorities.
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  It was actually 24-nothing in the Senate Banking Committee.
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  So he does enjoy strong support in Congress, and I think that would
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  help if we got to that point where he had to step in as vice chair.
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  That was a great conversation.
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  Thank you, John, for being here with me today.
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  Thanks to all of you for listening to C-Suite Perspectives.
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  I'm Yelena Shulyatyeva, and this series has been brought
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  to you by The Conference Board.