Key Points

  • Federal Reserve Chair nominee Kevin Warsh told the Senate Banking Committee on Tuesday that he would not act as Trump's "puppet" nor bow to presidential pressure to cut key interest rates.
  • The former Fed governor said the president has never urged him to lower benchmark rates, and he brushed off suggestions from committee Democrats that he would allow Trump to undermine the central bank's independence.
  • "As Fed Chair, I will be an independent actor," Warsh told the committee. "The president has never in any discussion asked me to pre-decide, commit, fix, or finalize any rate decision, and I would never do so."

In-Depth Analysis

In the months before being nominated as Fed Chair in January, Warsh had criticized the central bank for keeping rates too high, aligning with Trump's stance. On Tuesday, while not commenting on current borrowing cost levels, Warsh criticized the Fed for keeping the federal funds rate too low early this decade, failing to curb an inflation surge as the COVID-19 pandemic subsided.

Inflation has remained above the central bank's 2% target for five consecutive years. Price pressures have risen over the past year against the backdrop of Trump imposing the highest tariffs since the 1930s and ordering a strike on Iran in late February, which pushed up energy prices. Warsh did not blame tariffs or the war with Iran for inflation but instead held Fed policymakers responsible for dealing with stubborn above-target inflation.

"We are still dealing with the legacy of policy mistakes from 2021 and 2022," Warsh said. "Once inflation takes root in the economy, bringing it down is more costly and more difficult." He added: "The fatal policy errors of four or five years ago are still the legacy we are dealing with. In my view, fundamental policy reform is needed to address it."

Warsh said he supports "institutional changes in how policy is implemented," including "a different, new inflation framework" and relying more on interest rate moves rather than the Fed's balance sheet to influence price pressures and economic growth. He said the central bank needs to act immediately, without delay, in reforming its approach to inflation.

"We don't have a long time to conduct new research and think about how reform should proceed," Warsh said. "We have a short window to try to bring inflation back down to where it should be to ensure price stability."

Warsh has said that productivity gains from artificial intelligence could make it easier for the central bank to lower the federal funds rate and tackle inflation. "AI is rapidly becoming something like escape velocity," Warsh said. "It's important to revisit the Fed's models to see whether this innovation cycle could improve price levels over time, making the Fed's job on inflation easier."

In her opening remarks, Senator Elizabeth Warren of Massachusetts, the committee's senior member, said Trump nominated Warsh to have a compliant leader at the central bank. "The president has repeatedly and illegally tried to take over the Fed," Warren said. Trump seeks "to use monetary policy to artificially stimulate the economy in the short term, which is his last chance to do so before the November election." "Putting a 'puppet' in charge of the Fed would also allow the president to use the Fed's powerful tools for his own benefit," Warren said.

Warsh pushed back, denying he would take orders from Trump. "I take my responsibility as an independent leader of the Fed very seriously," Warsh said. "If I am confirmed by the Senate, I will take the integrity of this position and my personal integrity very seriously."