Kevin Warsh: Trump’s next fall guy at the Fed?
The nominee to lead the world’s most powerful central bank wants big changes. But there’s risk of confrontation with the president over interest rates
Claire Jones in Washington and Amelia Pollard in New York
© Rory Griffiths/FT montage/Getty ImagesDonald Trump’s choice to run the world’s most important central bank is about to begin his audition.
On Tuesday, the powerful Senate banking committee is due to begin hearings to confirm Kevin Warsh as chair of the US Federal Reserve.
At stake is not only the management of the biggest economy on the planet, but also decisions that can force other countries into devaluations or lift them out of their financial straits.
As the 56-year-old prepares for a gruelling few days on Capitol Hill, three big questions are in the air.
What does Warsh want to do at the central bank?
Will he follow in the footsteps of current Fed chair Jay Powell and find himself at loggerheads with Trump, with the US economy in the crosshairs?
And will the full Senate ultimately vote him into the post?
A series of interviews with people close to Warsh, as well as other Washington and Wall Street operators, gives a picture of a man who has waited years for his moment and who plans big changes in areas from communication policy to cutting down the Fed’s assets.
But there are even more immediate challenges.
With Trump pushing for interest rate cuts despite inflationary pressures stoked by the Iran war, appeasing the US president could set off a rift with the Fed’s 11 other rate-setters — and deeply undermine the central bank’s credibility after half a decade of above-target inflation.
Defying the White House risks putting Warsh on a collision course with the president, not least in the run-up to November’s crucial midterm elections.
“Logically, Trump would give [Warsh] some room and think ‘This guy has said he is basically in favour of lowering rates over time and I’ll give him some space before attacking him,’” says Don Kohn, a former Fed vice-chair who worked with Warsh during the financial crisis and is now at the Brookings Institution think-tank.
“But logic doesn’t always prevail on Truth Social.”
Who is Warsh and what does he want?
Warsh, who lost out to Powell eight years ago, has long coveted the top job at the Fed.
So much so that, when Trump floated soon after the 2024 presidential election that he could name him Treasury secretary, Warsh made clear he was much more interested in leading the central bank.
The Republican stalwart, who says he was “blessed” to be a student of arch-monetarist Milton Friedman while an undergraduate at Stanford, became the Fed’s youngest-ever governor in 2006 and rose to prominence in the most testing of times — the financial crisis.
Having previously worked at Morgan Stanley and George W Bush’s White House, he then became Fed chair Ben Bernanke’s go-between with Wall Street and Capitol Hill lawmakers.
He was also an inflation hawk who voiced concerns about price pressures just days before Lehman Brothers’ collapse in 2008.
Ultimately, the financial crisis that ensued proved to be deeply disinflationary.
By contrast, Warsh has been more dovish during Trump’s current mandate, as the president has labelled Powell a “numbskull” and “moron” for not slashing borrowing costs.
Warsh has adapted ideas from former Fed chair Alan Greenspan to argue that an AI-induced productivity boom will pave the way for steep interest rate cuts, an idea dismissed by other members of the rate-setting Federal Open Market Committee.
That is not the only possible source of tension with his putative colleagues.
He has spent much of the 15 years since he resigned from the central bank’s board of governors criticising the institution.
“He’s been away from the Fed for many years, watching from the outside, so it’s reasonable to think that he will come in with a fresh view of how things should be done,” says Raghuram Rajan, the former governor of the Reserve Bank of India and University of Chicago academic, who — like Warsh — is a member of the elite Group of 30 body of top economists and financiers.
“Of course, he will come in at a time when there are immense political constraints.”
Central to Warsh’s complaints about the Fed is the institution’s policy on communication, where he would prefer a less-is-more approach.
He despises the so-called dot plots, the charts issued four times a year that provide markets with 19 Fed officials’ anonymised predictions for interest rates.
“Once policymakers reveal their economic forecast, they can become prisoners of their own words,” he said in a speech a year ago.
Warsh would also like to limit the number of speeches and interviews he gives.
While he cannot control how much other Fed officials talk, he hopes they will follow his lead.
He believes such media exposure not only creates too much noise but also — unhelpfully — reinforces investors’ view that the central bank is the indispensable actor for solving economic problems and soothing market jitters.
“Warsh’s case for rowing back on communication is that they will be acting so consistently that it’s not necessary [to speak all the time],” says Vincent Reinhart, a former senior Fed official who is now chief economist at BNY Investments.
“He also thinks overcommunication creates the risk of overpromising or impairing the credibility of the committee.
And that makes the committee more vulnerable to political criticism.”
Trading scandals — which led to the resignation, most recently, of Fed governor Adriana Kugler — display a need for more self-examination by senior staff, Warsh believes.
The US central bank tightened its restrictions on trading by senior officials in 2022 in response to earlier transgressions.
The nominee also wants to reform the Fed’s approach to data gathering to include more real-time information, according to people familiar with his thinking.
He differs with the central bank over the causes of the surge in inflation at the start of this decade, which the Fed blames on the pandemic and the war in Ukraine.
Warsh believes that analysis is symptomatic of a lack of curiosity among some insiders, many of whom are long-termers he feels are too set in their ways.
Instead, he sees the central bank’s decision to purchase trillions of dollars of government debt as a significant reason why prices rose so much.
Warsh thinks deeper analysis of the issues could be aided by friendly “family fights” within the Fed.
That would mirror his experience in the Bernanke era, when the then chair, Warsh himself, and Kohn, who was then vice-chair, could privately thrash out their response to the financial crisis.
But to make his mark on monetary policy in an FOMC that under Powell has been largely consensus-based, he will have to carry his colleagues with him.
“He is intelligent and thoughtful . . . But his success at his new job will depend on his ability to engage constructively with the board staff and his colleagues on the committee on how he intends to move the Fed forward,” says Jeff Lacker, a former president of the Richmond Fed.
Lacker says that to advance his agenda, Warsh has to flesh out his criticisms of the Fed into a coherent argument.
“He’s made some sharp criticisms of board staff and Fed thinking. But it takes a model to beat a model.”
Warsh also wants to cut the institution’s $6.7tn balance sheet, bloated by huge bond-buying sprees to boost the economy during the financial crisis and the Covid pandemic.
Chris Waller, one of the most respected economists on the Fed’s board, who lost out to Warsh for the chair’s job, has rejected the idea of shrinking the balance sheet to pre-financial crisis levels as “inefficient” and “stupid”, since it could cause market turmoil by denying banks liquidity they seek.
People familiar with Warsh’s thinking say that any shift from the current reserves regime would happen only slowly, after extensive research had been carried out and would not seek to go all the way back to 2008 levels.
Warsh has argued that shrinking the balance sheet would create room for the Fed to cut short-term interest rates by tightening financial conditions through the alternative means of reducing the banking system’s liquidity.
But economists think selling off US Treasury securities would raise longer-term borrowing costs for the US government and mortgage holders.
“[Warsh says] he told Donald Trump that he could see a way to cut rates significantly because of [the balance sheet policy],” says Joseph Gagnon, a former Fed official who is now at the Peterson Institute for International Economics think-tank.
“But I’m guessing he didn’t tell Donald Trump that of course this actually might mean that mortgage rates would be higher not lower.”
Is Warsh set for conflict with Trump?
Warsh was not necessarily the US president’s first choice this year as Fed chair.
For a long time Trump suggested to members of his inner circle that his preferred candidate was National Economic Council director Kevin Hassett, a close ally.
But Hassett’s candidacy provoked a backlash on Wall Street over his fealty to Trump on issues ranging from tariffs to firing the head of the Bureau of Labor Statistics.
It was eventually scuppered by a criminal probe into Powell launched by Trump ally Jeanine Pirro, the US attorney for Washington DC.
Powell’s decision to mount a public fightback against a Department of Justice investigation he claimed was a ploy to push the Fed to cut interest rates highlighted what many on Wall Street saw as the danger of a Trump yes-man as central bank chief.
Financial titans such as JPMorgan Chase CEO Jamie Dimon worked in private to convince Trump to pick a candidate other than Hassett.
It was against such a backdrop that Warsh finally got the nod.
Warsh is hardly an unknown quantity to Trump.
He has a direct line to the president and there are also family connections.
The nominee is a son-in-law of Ronald Lauder, billionaire Republican megadonor and Trump college friend.
He knows Treasury secretary Scott Bessent, who ran the early stages of the interview process, from his time working in the family office of Wall Street titan Stanley Druckenmiller.
Given the contest for Trump’s favour, Warsh’s recent stance on interest rates has attracted particular scrutiny.
“Trump had loyalty and a willingness to deliver unconditional easing [of monetary policy] as one of the main criteria for picking his Fed chair,” says Derek Tang of Monetary Policy Analytics.
“But of course, Warsh also has a very long paper trail [of hawkishness on interest rates].”
Alan Schwartz, who worked with Warsh during his time at Bear Stearns, the investment bank whose collapse in 2008 heralded the financial crisis, argues that the nominee will primarily respond to changes in the economy, not pressure from the White House, in deciding what to do on interest rates.
“While that aligned with what the Trump administration believed was right, if the facts changed, Kevin will not stay rigid,” says Schwartz, who is now executive chair of private asset manager Guggenheim Partners, and closely worked with Warsh during the crisis.
“Kevin has a strong reputation as an expert on financial policy and will be driven to get to the right answer.”
His more immediate problem, assuming he wins Senate confirmation, is that the fallout from the Iran war has hit his options for even a small rate cut that could mollify the president, at least in part.
“It’s not a great time to be coming in, it’s full of challenges,” says Rajan, who also believes that — in addition to high inflation — problems in the private credit sector could leave Warsh having to handle risks to the US financial system’s stability.
“But he has the capability to do it, so I am hopeful it works out.”
With oil prices far above their levels before the war, markets think a rate cut at the Fed’s June meeting — which would be Warsh’s first if he takes over from Powell in mid-May — is off the cards.
Futures trading suggests expectations of a less than 50 per cent chance of one quarter-point cut in rates this year, hardly the course of monetary policy sought by a president who has repeatedly called on his Truth Social network for the Fed to cut rates “substantially” and “immediately”.
Tang of Monetary Policy Analytics adds: “For Warsh, the honeymoon period might be very short.”
Indeed, Trump’s antagonistic attitude towards the Fed is not confined to Powell and interest rate policy.
The president has tried and failed to fire Fed governor Lisa Cook over allegations of mortgage fraud.
She denies the claims and has taken the president’s bid to sack her to the Supreme Court.
That record could complicate another Warsh goal — reshaping the central bank’s relationship with the executive branch.
Warsh argues, partly as a consequence of his push to rein in the Fed’s balance sheet, that the central bank should redraw its relationship with the Treasury so that, outside financial crises, it no longer buys huge quantities of bonds to help bolster the US economy.
But, given Trump’s public hostility towards Powell and Cook, Warsh’s ability to push for root-and-branch reform on Capitol Hill is unclear.
“Most in the Senate think the institution works,” says Michael Feroli, chief US economist at JPMorgan Chase.
“I don’t think they’ll want to hear from a guy who wants to make wholesale changes.”
What are the hurdles to Warsh getting the job?
Warsh has plenty of supporters — both Democrat and Republican — among academic economists and former top officials.
During his Fed days Austan Goolsbee, now Chicago Fed president, worked with him from the Obama White House.
“I have every expectation he’s gonna take the job really seriously,” Goolsbee told the FT last week.
“He cares about the Fed.”
Former secretary of state Condoleezza Rice said in an interview shortly after Warsh’s nomination that he “cares deeply about the issues and the American economy and American prosperity . . . Kevin’s going to follow his mind and his mission.”
But Warsh still does not know when — or even whether — the full Senate will vote on his confirmation.
Thom Tillis, a Republican senator from North Carolina who sits on the banking committee, has said he will stop Warsh’s nomination from going to a formal vote in the full Senate until the criminal probe of Powell is dropped.
That opens up the possibility that the serving Fed chair remains in position even after his term expires on May 15.
Such an outcome would hardly be welcome to the US president. Trump said last Wednesday he would fire Powell if the Fed chair did not leave “on time” and added he still wanted Pirro to pursue her criminal investigation.
Powell says he will remain as pro-tem chair until Warsh wins majority support on the Senate floor.
Without the backing of at least 51 of the Senate’s 53 Republicans, Warsh’s bid to become Fed chair will be likely to fail in a Senate characterised by bitter partisanship.
Once the probe into Powell reaches its conclusion, many in the administration and on Capitol Hill — and on political prediction markets — think that a Republican Senate will ultimately not deny Warsh the role he has coveted for so long.
Some argue the delays could even prove something of a blessing for the prospective Fed chair.
Legal decisions in favour of Cook and Powell would not only unblock his confirmation process, but also give Warsh cover from White House pressure.
Even though Warsh has been quiet in recent months about Fed independence, he has spoken on the matter publicly before.
In 2010, while still a Fed governor, he gave a speech titled “An Ode to Independence”, in which he called central banks’ ability to make their own decisions “precious” and a “cornerstone of institutional credibility”.
“I’m sure Warsh, whatever he told Trump, does not want to go down as the next Arthur Burns and be the man who unleashed years of stagflation,” says Gagnon, the former Fed official, referring to the central bank chief widely remembered for succumbing to the will of President Richard Nixon and, in so doing, helping ramp up inflation.
“If the Supreme Court defends Lisa Cook and protects her position, then presumably Warsh will be protected too.
I think he will feel that he can do what he thinks is right — and what he thinks is right is likely to disappoint Trump.”
Additional reporting from Stefania Palma in Washington
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