Kevin Warsh: Will the Fed’s Next Chair Preserve Central Bank Independence Under Trump?

Kevin Warsh is now likely to secure Senate approval as the next Federal Reserve chair—and become arguably the most powerful central banker in the world.

But when Warsh appeared before the Senate Banking Committee for his confirmation hearing in April, one punchy question underscored the dilemma that Warsh, lawmakers, and the Fed all face: “Are you going to be the president’s human sock puppet?” asked Republican Senator John Kennedy of Louisiana.

On one level, the question reflects President Donald Trump’s intense pressure on the central bank to cut rates, with current Chair Jerome Powell often the target of his ire. But it also points to Warsh’s own inconsistency on inflation.

Earlier in his career, Warsh was a “hawk,” pushing for interest rate hikes to curb inflation and opposing the novel crisis management authorities that the Fed took on after the 2008 financial meltdown. Now, Warsh supports the interest rate cuts that Trump has exhorted as a way to juice growth.

Warsh has also come under fire for his deep ties to the financial sector, where he once worked. Lawmakers such as Democratic Senator Elizabeth Warren of Massachusetts have cited the potential conflict of interest posed by his undisclosed assets, even though in theory they’ll be divested as part of Warsh’s arrangements with the government’s ethics watchdogs if he becomes chair.

As scholars who study central banks and the politics of finance, we understand why concerns about Warsh’s credibility have persisted. But perhaps counterintuitively, we also believe that once he’s confirmed, his finance background could reinforce his prior hawkish leanings, leading to more independence from Trump on inflation and interest rates.

What’s at Stake for the Federal Reserve?

If confirmed as chair, as expected, Warsh and his colleagues on the Fed’s policy-setting committee would wield enormous power. Not only does the central bank set the benchmark rate that determines short-term lending, but the Fed also oversees a $6.7 trillion balance sheet, mostly in government bonds, that partially affects longer-term borrowing costs.

Guided by its mandate to control inflation, the Fed’s decisions impact everything from grocery prices to mortgage rates.

Warsh’s Career and Financial Sector Ties

Along with Warsh’s prior stints in government and on the Fed’s policymaking board as a governor, he worked for the investment firm Morgan Stanley and the hedge fund Duquesne Capital.

In those positions, Warsh advanced his career in an industry that has long preferred hawkish Fed policies, even at the cost of job growth: Wall Street is generally “conservative” in that it favors lower inflation and higher interest rates on grounds that those policies can support bigger bank profits and higher prices for bank shares, while reducing the risks brought by disinflation policies.

While serving as a Fed governor in the aftermath of the 2008 financial crisis, Warsh’s comments reflected this outlook. He talked extensively about inflation being a “choice”—that is, the result of poor policy decisions, rather than broader structural forces. He also questioned the Fed’s massive bond purchases, which were meant to stimulate the economy and reduce high unemployment by pushing long-term borrowing rates.