Kevin Warsh Fed Nomination Faces Senate Hurdles Over DOJ Investigation, Rate Policy Questions

Kevin Warsh, President Trump's nominee to serve as the next chair of the Federal Reserve, may face a tough fight for confirmation — partly over events for which he has no control. The Senate Banking Committee holds a confirmation hearing for Warsh on Tuesday — but already one GOP senator has said he will block a vote on the nominee until the Department of Justice drops an investigation into the Fed. Warsh will also likely face questions about inflation and borrowing costs and whether he can maintain his independence as Trump makes it clear he expects his next Fed chair to lead the charge to lower interest rates. Here are three things to know as the confirmation process begins.

Most of the drama has nothing to do with Warsh himself

A key member of the banking committee, Sen. Thom Tillis, R-N.C., has promised to hold up confirmation of the nominee, but not because of any objection to Warsh himself. Tillis wants the Justice Department to drop its criminal investigation of the central bank and its current chairman, Jerome Powell. That probe is ostensibly about cost overruns on the Fed's headquarters renovation project. But Powell says it's really part of a pressure campaign by the Trump administration to get the Fed to lower interest rates, and a federal judge agreed, blasting the investigation as an unjustified act of intimidation. The DOJ has promised to appeal the judge's decision. By dropping its probe, the administration could win Tillis's vote and clear the way for Warsh's confirmation. But that hasn't happened yet.

Warsh has argued for lower interest rates, but it may not be so easy

Kevin Warsh previously served on the Fed's board of governors, and had a reputation as "hawkish," meaning he was cautious about cutting interst rates for fear inflation might get out of control But recently, he's argued that productivity gains from artificial intelligence could allow the central bank to lower interest rates while still keeping prices in check. Critics like Sen. Elizabeth Warren, the ranking Democrat on the banking committee, see that flip-flop as a sign that Warsh will take direction on rates from President Trump, even though the Fed is supposed to operate free from political pressure. "Warsh has really gone out of his way to demonstrate that he will be the sock puppet in chief," Warren told NPR. While past presidents have given the Fed wide latitude, at least publicly, in setting interest rates, Trump has been outspoken in demanding lower rates, raising concern that he could jeopardize the Fed's independence. Even if Warsh wants to lower interest rates, he may not be able to. Interest rates are set by a 12-member committee at the Fed, and many committee members are reluctant to cut rates until inflation is closer to the central bank's 2% target. The war with Iran and resulting spike in gasoline prices has made that a more challenging goal.

Warsh has also called for other changes at the central bank

If confirmed, Warsh could also seek to narrow the Fed's footprint in the economy. Warsh has criticized the Fed for straying beyond its statutory role of promoting stable prices and maximum employment. He's argued that the central bank should play a smaller role and that Fed leaders should talk less and stay in their lane.