- Key insight: Kevin Warsh's confirmation hearing to lead the Federal Reserve Tuesday is expected to center less on his qualifications than on a political firestorm surrounding the central bank.
- Forward look: Warsh, who served on the Fed board from 2006 until 2011, faces a potentially deadlocked Senate Banking Committee, where a no vote from Sen. Thom Tillis, R-N.C., could produce a 12-12 tie and stall the nomination.
- What's at stake: If confirmed, Warsh would inherit a Fed that he hopes to significantly reshape by shrinking its balance sheet and pulling back its role in markets.
WASHINGTON — Kevin Warsh is a former Federal Reserve governor with a successful Wall Street career. On those merits, his nomination should be one of the least controversial of President Trump's second administration.
But Warsh's confirmation hearing, scheduled for Tuesday morning on the Senate Banking Committee, isn't likely to hinge on his qualifications. Warsh has been nominated to lead the Fed as its chairman, replacing Jerome Powell, one of the few policymakers to be nominated by both President Donald Trump in his first term and President Joe Biden.
Powell's relationship with the Trump administration, however, has been tumultuous. He hasn't lowered interest rates quickly enough for the president, and has expressed
The stakes of the standoff between the White House and the Fed were raised earlier this year when Powell announced that
That backdrop has made Warsh's path to confirmation considerably more complicated than it might otherwise have been.
"The first question is, will Warsh maintain Fed independence?" said Aaron Klein, a senior fellow at the Brookings Institute. "Warsh is going to promise Congress he will, probably after promising Trump that he won't, so somebody is going to be disappointed."
Mark Spindel, founder of Potomac River Capital LLC, said this dynamic leaves Warsh in a tough spot. Generally, Warsh is well regarded in many economic and financial circles, Spindel said, and he will want to protect that goodwill.
"I think he cares about his legacy long after the Trump presidency is over," Spindel said. "This is a very long, extended appointment and term — obviously, as a governor, [and] his term as chair will transcend the Trump presidency. He's going to have to walk this balance between Democratic members, certainly Republican members, and the very intense pressure from the Oval Office."
For bankers and Wall Street, there are practical considerations. If Warsh takes his monetary marching orders from Trump, he'll lower rates in the short term, which will lead to higher inflation in the long term, Klein said.
"And if he's perceived as not being independent, we may have a negative market reaction," he said.
The biggest changes to the central bank that
"The Fed solution to every market problem seems to be more Federal Reserve, and that thinking has been wrong every time," Klein said. "I'm consciously optimistic that Warsh is going to change the Fed's default answer, which is: more Fed is good."
The central bank's balance sheet swelled to nearly $9 trillion at its peak, as the Fed purchased Treasury bonds and mortgage-backed securities to support the economy in the early days of the COVID-19 pandemic. It has since shrunk to around $6.7 trillion, but remains far larger than its pre-crisis levels. Warsh has long been a critic of that expansion.
"The Fed's bloated balance sheet, designed to support the biggest firms in a bygone crisis era, can be reduced significantly," he said in a Wall Street Journal
But despite his qualifications and policy prescriptions, Warsh faces an uncertain road to confirmation. Sen. Thom Tillis, R-N.C., has promised to oppose Warsh's nomination as long as the DOJ investigation into Powell is ongoing. Republicans have 13 members on the committee to Democrats' 11, meaning that if all Democrats and Tillis vote against Warsh's confirmation, the panel will be evenly split and the nomination will fail to advance to the full Senate.
"If he simply doesn't vote, Warsh would advance 12-11, but it sounds like Tillis' intention has been to impede the nomination from going forward until the DOJ investigation is resolved, not to simply register his displeasure," Ian Katz, a managing partner at Capital Alpha Partners, said. "What's ironic, among other things, is that Warsh, in my view, might have had a chance at getting a Democratic vote or two if it weren't for the DOJ investigation of Powell."
Democrats have thus far shown no sign of coming to Warsh's rescue. Sen. Elizabeth Warren, D-Mass., the ranking member of the committee, has raised fresh concerns about Warsh's ethics disclosures.
Should he be confirmed, Warsh would likely be the wealthiest Fed chair in the central bank's history. His net worth, according to his financial disclosures, exceeds $100 million, and that wealth is closely tied to Wall Street and Silicon Valley holdings that Democrats are likely to probe.
"I think when you go through that financial disclosure form, you'll notice a lot of work with crypto and tech businesses, which I think will also raise some curiosities on the committee," Spindel said. "So that'll be another path that I think some of the senators will pull on, and that may get bipartisan interest."
And much of Warsh's holdings were not disclosed in their entirety, Warren told reporters last week.
"There's more than $100 million in assets to people or entities or outfits that are completely undisclosed and will remain undisclosed," she said. "That's not just a red flag, that's a red flag surrounded by fireworks and sparklers."
