Fed Chairman Warsh questioned about independence from Trump
Washington (CNN) — Federal Reserve Chairman Kevin Warsh on Tuesday offered his most detailed account yet of the sweeping changes he’s ushering in at America’s central bank and the philosophy behind them.
Warsh appeared before the House Financial Services Committee to deliver the Fed’s semiannual Monetary Policy Report, a routine overview of the central bank’s affairs in recent months. He is scheduled to appear before the Senate Banking Committee on Wednesday.
The new Fed leader repeated many of the themes from his first news conference last month, after officials voted to hold their benchmark lending rate steady for the fourth consecutive meeting. That included his commitment to bringing inflation under control and his plan to establish five task forces review factors affecting monetary policy.
In his exchanges with House lawmakers on Tuesday, Warsh provided new details on how the task forces will present their findings. He was also pressed repeatedly on his views about the Fed’s political independence, the potential economic impact of AI and the lessons he drew from serving as a Fed governor during the 2008 global financial crisis.
Here are key takeaways from Warsh’s first congressional testimony, as policymakers navigate stubborn inflation and mounting geopolitical risks:
More details on his reforms
In his post-meeting news conference last month, Warsh announced task forces that will study and give recommendations on improving the following areas related to US monetary policymaking: communications; balance sheet policy; economic data; productivity and jobs; and inflation frameworks.
On Tuesday, Warsh said the task forces will share their findings “first with the decision makers,” who are the 19 members of the Federal Open Market Committee, the Fed group that sets interest rates. Then Warsh himself will present that to the public.
Warsh also explained that any proposed policy changes to the Fed’s $6.7 trillion balance sheet will be telegraphed to the public before any actual changes are made.
“If there were a change in balance sheet policy, we would preview it, explain it, debate it, and no changes in balance sheet policy would happen without good advance notice to the likes of this committee and broadly, financial markets,” Warsh said.
The Fed’s balance sheet became a major monetary policy tool during the Great Recession, when the central bank bought massive quantities of Treasuries and mortgage-backed securities to support the economy. Critics argue the expansion has pushed the central bank beyond its traditional remit.
‘We’re honored to be independent’
Warsh was pressed several times as to whether he believes in the Fed’s ability to set interest rates without political interference.
Democratic Rep. Nydia Velázquez of New York asked Warsh if he works for Trump, to which the Fed leader responded: “We’re an independent central bank.”
“We’re honored to be independent,” he told Velázquez. “Outside the four walls of the Federal Reserve, there’s no doubt a lot of politics.”
He reiterated that view in an exchange with Democratic Rep. Gregory Meeks of New York, who pressed Warsh on how he would respond if Trump “publicly pressures you to pursue a different course” than that warranted by economic data.
“My commitment to you is to follow the law and follow the data. Follow our very best judgment,” Warsh responded.
Warsh’s commitment to being independent continues to face scrutiny. The president last year waged an aggressive pressure campaign against the central bank in an effort to force lower interest rates. During the search for the next Fed chair, Trump said he expects his appointee to push for lower rates. Warsh maintains that he made no such promise to the president and will act independently.
AI is ‘the most striking feature of the economy right now’
Warsh pointed to the ongoing AI infrastructure buildout as a powerful force shaping the US economy, though he acknowledged that much of its economic impact remains uncertain.
“We don’t know the extent to which the economy will benefit from the AI buildout,” Warsh said in his opening remarks. “Yet it seems inevitable that what is now called ‘AI investment’ will soon be called just ‘investment.’”
In an exchange with Republican Rep. Bryan Steil of Wisconsin, Warsh made it clear that he’s bullish on AI’s potential benefits for the US economy and society in general.
“Like previous positive technology shocks, the US will be richer, will be more productive, there’ll be more labor, there’ll be more wage compensation,” Warsh said. “This is probably the biggest change in my adult lifetime, because it’s not just the creation of a new widget.”
“What it’s changing is the method of innovation and the speed of innovation, and I can’t think of a country on earth as well positioned to take advantage of it,” he added, though he also recognized “it might be disruptive in the near term.”
Lessons from his prior stint at the Fed
Warsh reflected on his time as a Fed governor from 2006 to 2011 and the lessons he learned as the US economy descended into the worst recession since the Great Depression.
“I still have the scars from the 2008 crisis,” Warsh said.
The Fed chief said he learned of the importance of collaborating with other regulators and stewards of the US economy in times of crises, particularly the Treasury secretary.
“The Treasury secretary and the Fed chairman, they often had to work in tandem,” he said. “It’s hard to distinguish in crisis times, separate from more benign times, exactly where those roles and responsibilities are.”
At the time, the Fed turned to large-scale asset purchases to beef up its portfolio in an effort to inject liquidity in the financial system and encourage lending when interest rates were already near zero. That policy became known as “quantitative easing,” or QE. Warsh initially supported the Fed’s response, but later resigned after raising concerns about additional rounds of asset purchases.
On Tuesday, Warsh said the Fed is revisiting that approach through one of the task forces.
“The Fed balance sheet, both its size and duration, are worthy of a very worthwhile review,” he said. “I’m inclined to think that there are better regimes we can go to, but we’re not going to do it without due consultation with the markets and with members.”
In 2019, when the Fed was shrinking its balance sheet, the cushion of reserves available in the banking system dropped, leading to a spike in overnight lending rates that forced the central bank to step in and add liquidity back into markets. That episode highlighted the challenges of managing a much larger portfolio.
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