“Are you going to be the president’s human sock puppet?”
That question from Senator John Kennedy, a Louisiana Republican, came early during Kevin M. Warsh’s confirmation hearing on Tuesday to become the next chair of the Federal Reserve.
It was not the first time that the label had been invoked by lawmakers on the Senate Banking Committee that morning, nor would it be the last.
At every opportunity during the hearing, his first public remarks since President Trump tapped him for the job, Mr. Warsh sought to disabuse lawmakers of the notion that he would do the administration’s bidding when it came to interest rates if confirmed to replace Jerome H. Powell as chair.
He repeatedly denied that Mr. Trump had made him promise anything regarding the Fed’s future decisions on borrowing costs. He pledged to defend the central bank’s autonomy to set policy based strictly on “analytic rigor, meaningful deliberation and unclouded decision-making.” And he made clear that stamping out inflation would be a top priority during his tenure, saying that stable prices must be pursued “without excuse or equivocation.”
But shaking off the perception that he will be pliable to the president’s pressure campaign will not be easy for Mr. Warsh, especially given his ambitions to overhaul the institution he soon hopes to lead. Nor will it be easy for him to actually deliver what Mr. Trump wants if he tries to do so, setting up a potential clash that risks keeping tensions elevated between the White House and the Fed.
“Since he was picked by a president who clearly wants lower rates, he’s coming in with a cloud over his head of not being credible,” said Priya Misra, a portfolio manager at J.P. Morgan Asset Management. “He has his work cut out for him.”
Mr. Trump did not help Mr. Warsh’s cause on Tuesday, quipping hours before the hearing started that Mr. Warsh might need to have an office next to him in the White House if the Fed’s renovations of its headquarters in Washington are not soon complete. That project is at the center of a criminal investigation that the Justice Department launched into Mr. Powell and the central bank, a move that has sparked significant opposition from lawmakers on the Senate Banking Committee and is now holding up Mr. Warsh’s confirmation process.
Mr. Trump on Tuesday also made clear that he would be disappointed if his pick for chair did not cut rates right away.
The rationale for rate cuts, however, has become all the more tenuous in the wake of the Iran war. Energy prices have shot higher, causing a sharp jump in inflation in March. The longer the conflict drags on, the larger the economic impact will be, resulting in higher inflation across a wider range of goods and services as well as a bigger hit to growth. The fear for officials is that Americans may start questioning the Fed’s willingness to return inflation to its 2 percent target, something the central bank has missed for roughly five years.
Officials at the Fed already seem less inclined to support rate cuts in the coming months. Christopher J. Waller, a Fed governor who once was in the running to become the next chair, said in a speech last week that the Fed needed to be “cautious” about cuts amid the war. The continued closure of the Strait of Hormuz, a vital shipping pathway, could mean maintaining rates at the current range of 3.5 percent to 3.75 percent for longer “if the risks to inflation outweigh those to the labor market,” he said.
Matthew Luzzetti, chief U.S. economist at Deutsche Bank, expects the Fed to remain on hold for the remainder of the year given his forecast for inflation to stay elevated and for the labor market to remain stable. Even Treasury Secretary Scott Bessent said last week that the Fed should “wait and see” before lowering rates again, a rare endorsement of the central bank’s current approach.
Mr. Warsh on Tuesday declined to signal exactly how he saw rates evolving, but he did call for “regime change in the conduct of policy.”
That would include a new inflation framework to redress one that he said led to a “fatal policy error” in the aftermath of the pandemic. Back then, officials misjudged the extent of resurgent price pressures, causing a delay in shifting to rate increases. Mr. Warsh said he was most focused on the “underlying inflation rate, not what’s the one-time change in prices because of a change in geopolitics or a change in beef.”
In that vein, he called for a rethink of the economic data the Fed most closely tracks and changes to how policymakers communicate.
He criticized his future colleagues for talking too much and for boxing themselves in by openly sharing their forecasts. He talked on Tuesday about his opposition to communication tools like the “dot plot,” which aggregates what policymakers think will happen with rates and various economic metrics. Mr. Warsh, who previously served as a Fed governor between 2006 and 2011, said he also wanted the discussions in the room during policy meetings to be “messier,” relying less on “rehearsed scripts.” He said he would welcome a “good family fight.”
If the economic backdrop does not look drastically different by the time Mr. Warsh is confirmed and yet he pursues lower rates, he is likely to get exactly that kind of fight.
As chair, Mr. Warsh will confer just one vote on the 12-person policy-setting committee. If he is to get his way on rates, he will have to convince the bulk of the remaining six members of the board of governors, the president of the Federal Reserve Bank of New York and presidents from four of the other regional reserve banks to vote alongside him.
Already, one of his leading arguments for lower rates has faced pushback. Mr. Warsh has suggested that a boom in artificial intelligence would unleash massive productivity gains that accelerate growth without pushing up prices. He has said the technology would be “structurally disinflationary,” giving the Fed space to cuts rates.
On Tuesday, he acknowledged that “considerable work” was needed to evaluate the productivity wave.
Insiders at the Fed and lawmakers at the confirmation hearing appear skeptical, however. Mr. Kennedy on Tuesday warned Mr. Warsh to be “careful” of buying into the A.I. “hype” from people trying to stoke interest before taking their companies public. Central bankers, meanwhile, seem concerned that A.I. could drive up inflation at least in the short-term before falling, while also raising the level of rates that are seen as neither stoking growth nor stymieing it. There is also deep uncertainty about just how big the overall long-run A.I. productivity gains will be.
With inflation still not back to the Fed’s target and fresh price pressures mounting with the war in Iran, Sarah House, an economist at Wells Fargo, said Mr. Warsh’s approach was likely to be perceived as too risky.
“They are getting weary of the prolonged overshoot of inflation and that’s limiting how much they’re willing to go out on a limb that, from a more theoretical framework, you should see inflation fall later,” she said.
Amassing broad-based support for that argument, and any others that move policy in the direction the president wants, is also likely to be more difficult if Mr. Warsh drastically reduces how much he speaks publicly as chair.
Throughout his tenure, Mr. Powell has delivered speeches and participated in various moderated discussions while also answering questions at eight news conferences a year, after each of the Fed’s rate-setting meetings. Other officials, especially presidents from the regional banks, have spoken with significantly more frequency. While sometimes that has resulted in a cacophony of opinions around the Fed’s policy settings and economic views, it has greatly reduced misunderstandings about the central bank’s stance and limited the degree to which financial markets are surprised about policymakers’ next steps.
Mr. Warsh sidestepped a question on Tuesday about whether he would scale back on how much the Fed communicates, a move that Mr. Luzzetti warned could be counterproductive to his cause.
“The news conferences offer the chair an important platform for establishing the narrative coming out of the meeting,” Mr. Luzzetti said. “I don’t see the benefits of Warsh giving that up, particularly if he welcomes ‘messier’ debates and decisions.”
Ms. Misra added that returning to a world in which the Fed was more impenetrable, with the debates behind its policy actions more obscure, would also undermine Mr. Warsh’s efforts to be seen in a different light.
“More transparency is better because if you are in the midst of change, you actually want people to understand why you took a certain policy action,” she said. “It’s helpful in getting the public to perceive the Fed as independent and credible.”
