Kevin Warsh will impose a regime change after being appointed chairman of the Federal Reserve

Kevin Warsh has spent the last decade yearning for the chairmanship of the Federal Reserve, a goal he has just achieved after Senate confirmation, thanks to the Republican majority. He succeeds Jerome Powell, a frequent target of Trump’s attacks (both legal and verbal), whose term officially ends this Friday. Warsh, a millionaire, is poised to fulfill his dream at a crucial moment for the United States’ central bank.

He could have chaired the Fed eight years ago, when Donald Trump, then in his first term as U.S. president, considered him for the position before ultimately choosing Powell. It was a decision he quickly regretted. The president even went so far as to say that Warsh was too handsome and young for such a prestigious post. Now, at 56, the economist born in Albany, New York, is poised to implement a “regime change” at the Fed, as he himself stated during the public hearing before the influential Senate Banking Committee, which had to approve his nomination.

Throughout his career, Warsh has left a visible trail of criticism directed at the Federal Reserve’s organization and strategy. With well-crafted speeches, literary flourishes, and frequent historical references, he has launched scathing attacks against Powell and Fed officials. In a famous speech delivered in 2016, he criticized the groupthink of economists and central banks for fostering “repetitive policies, flawed models, and disappointing economic outcomes.” Quoting Copernicus and Ptolemy, he wrote: “Economies do not die of old age; they die of policy mistakes.” And he added, in what has become one of his mantras ever since: “All economic models are wrong, but some are useful.”

Against balance sheet expansion

He is already familiar with the institution. He was governor from 2006 to 2011 under Chairman Ben Bernanke. During that time, he served as the liaison between the central bank and Wall Street during the 2008 financial crisis, which brought the financial system to a standstill. A graduate in economics from Stanford and Harvard, he worked as a financial advisor at Morgan Stanley, where he cultivated a network of contacts in the exclusive world of New York high finance. This experience proved invaluable in helping to design the rescue mechanisms that the Federal Reserve launched during the Great Recession to prevent the widespread collapse of major banks.

Following the great financial crisis, he left the Fed in 2011, frustrated by the persistence of monetary stimulus measures. The bank had launched Quantitative Easing (QE), a mechanism for purchasing bonds and corporate debt aimed at injecting money into a financial system depleted and drained after the collapse of Lehman Brothers. This unprecedented policy increased the Fed’s balance sheet, as it exchanged new money for debt securities. When the first major wave of the crisis was still receding, Warsh argued that it was time to dismantle this financial structure. However, Bernanke believed that risks still loomed over the economy.

Since then, Warsh has criticized the size of the central bank’s balance sheet, the way forecasts are made, the data and statistics used, and the direction of monetary policy in recent years. He has accused Federal Reserve officials of being complacent about inflation, of clinging to the status quo, and of overstepping their monetary policy mandate.

New tools

One only needs to review Warsh’s remarks during his Senate hearing to grasp his statement of intent. Neat and elegant, he made his position clear. He stated that during the COVID-19 crisis, “the Fed missed the mark.” “The fatal policy mistake of four or five years ago is still a legacy we are grappling with,” he insisted. Warsh also clarified his principles during his Senate appearance. That implies a regime change in the conduct of monetary policy, he emphasized, and “using tools differently. The Fed has an interest rate tool and a balance sheet tool. My view is the interest rate tool gets in the cracks. It’s fairer. The balance sheet tool disproportionately helps those with financial assets. The interest rate tool hits the entire economy. And I would add new communications,” he told the senators who were to approve his nomination.

The economist believes that the Fed’s balance sheet, currently at around $6.7 trillion, compared to the $9 trillion it reached after the pandemic or the $4 trillion after the financial crisis, is merely a fiscal policy tool that does not benefit households. Furthermore, he argues, contrary to other opinions, that interest rates should be lower to absorb the productivity gains generated by artificial intelligence (AI).

He also wants to overhaul the communications strategy, reducing so-called “forward guidance” because he believes it influences future decisions. He is even considering limiting press conferences to those following decisions by the Federal Open Market Committee (FOMC), which sets interest rates.

To bolster independence

However, Warsh’s first major test will be demonstrating independence from the White House. Trump has pressured Powell to adhere to his personal desire to cut interest rates more aggressively. On the very day Warsh testified before the Senate, the Republican president made it his mission to set limits. “We should have the lowest interest rate in the world,” he said in an interview on CNBC, where he asserted that he would be “disappointed” if a Federal Reserve led by Warsh failed to deliver on its promise to lower rates immediately.

“The president never asked me to predetermine, commit, fix, decide on any interest rate decision in any of our discussions, nor would I ever agree to do so,” Warsh stated at the Capitol. The new governor — married to Jane Lauder, heiress to the Estée Lauder empire, whose fortune is estimated at nearly $2 billion — has strived to defend his independence from Trump. He is the wealthiest central bank governor in the institution’s history. He has pledged to divest himself of any assets that could create a conflict of interest within 90 days.

“Let me be very clear: monetary policy independence is essential. Monetary policy makers must act in the nation’s interest. Their decision’s the product of rigor, deliberation and unclouded decision making,” he stated. Despite his words, he has not managed to dispel doubts about his independence.

Perhaps it was because of his refusal to directly answer a question posed by Democratic Senator Elisabeth Warren: “Did Donald Trump lose the 2020 election?” The question was significant, because the president maintains without evidence, and despite all the judges having proven him wrong, that the Democrats stole that election from him, and he has dragged many conservatives into that conspiracy theory.

Seeking consensus in a divided Fed

Warsh will also be taking over a more divided Fed, with rising inflation (3.8% year-on-year) and uncertainty about the path forward. Pressure from the White House has created a rift within the institution, where dissenting voices regarding interest rate decisions are becoming increasingly common. For years, all members of the Federal Open Market Committee (FOMC) voted unanimously. This was the case for almost two decades, between September 2004 and September 2014. Since then, coinciding almost exactly with Trump’s return to the White House, dissenting voices have emerged. The last meeting saw three dissenting votes, the largest number of dissents in nearly 35 years.

Finally, his term will also be marked by the presence of the former chairman on the board of governors. Jerome Powell is stepping down as chairman, but will remain on the board as a governor “for an indefinite period.” He is not expected to mount an opposition against Warsh; Powell has announced that he will play a low-profile role. It remains to be seen what influence he will have on the Federal Open Market Committee. Will he embolden the hawks or, on the contrary, represent a tacit vote of support for Warsh by staying out of any controversy? What is clear is that a regime change has begun at the Federal Reserve.

Sign up for our weekly newsletter to get more English-language news coverage from EL PAÍS USA Edition