Kevin Warsh sworn in as new Fed chair amid independence concerns

New Federal Reserve chair Kevin Warsh promised to preserve the Fed's independence as he was sworn in at the White House on Friday.

It's an unusual step, since Fed chairs are not normally sworn in at the White House, and presidents usually don't attend, given that the Fed is meant to be politically independent.

At Warsh's confirmation hearing, US President Donald Trump insisted the incoming central bank chief would be "totally independent."

But some, particularly Democrats, have questioned how independent Warsh will be as head of the world's most powerful central bank.

Among them is Democratic Senator Elizabeth Warren, who described Warsh as Trump's "sock puppet” during his Senate confirmation hearing in April. Stressing that independence requires courage, Warren asked Warsh: "Let's check out your independence and your courage. We'll start easy. Mr. Warsh, did Donald Trump lose the 2020 election?”

Warsh refused to answer directly, saying instead: "We try to keep politics, if I'm confirmed, out of the Federal Reserve.”

"His confirmation hearing did not ease concerns," Claudia Sahm, chief economist at New Century Advisors and former economist at the Federal Reserve, told DW.

This skepticism was then reflected in Warsh's confirmation vote — where only 54 senators voted in his favor while 45 voted against — "the narrowest margin of any Fed chair," Sahm said.

A high-stakes appointment

The Fed chair is one of the most powerful people in the US, overseeing the central bank's decisions on interest rates, which influence not just the banking sector and the dollar's exchange rate but also whether goods and services in the world's largest economy become more or less expensive.

Those serving in that role are therefore expected to ensure price stability, maintain confidence in the financial system and safeguard the stability of the global economy.

But Trump has made no secret of what he expects from Warsh, saying that he would be "disappointed” if Warsh didn't cut interest rates right away.

The president seems to have an eye on the midterm elections in November, hoping that lower rates will boost the US economy in the run-up to the key polls.

Warsh has publicly stated that Trump didn't pressure him on interest rates.

"The president never once asked me to commit to any particular interest rate decision, period," Warsh said during his confirmation hearing. "Nor would I ever agree to do so if he had," the 56-year-old asserted.

Trump undermining central bank's independence

Warsh's predecessor, Jerome Powell, knows firsthand what pressure from Trump would look like.

The US president has repeatedly heaped insults on Powell for not lowering rates, and was even targeted by a Justice Department investigation.

The Fed is supposed to be politically independent, but if that were to change it would have massive repercussions, said Kenneth Rogoff, an economist and professor at Harvard University.

"The independence of the US federal reserve is uniquely important in the global financial system. Because the dollar sits at the top of the global financial system. And when the US becomes unstable it affects everyone," he told DW.

Trump's trade policies and the Iran war have already eroded international confidence in the US president, but "when I talk to investors and ask them what they really pay attention to, they say: the independence of the central bank," Rogoff pointed out.

Money and connections

Warsh, who was born in New York's state capital, Albany, studied political science with a focus on economics and statistics at Stanford University. He then attended the prestigious Harvard Law School and earned a law degree in 1995.

Afterward, Warsh had a stint in investment banking at Morgan Stanley. In 2002, then-US President George W. Bush appointed him as his economic adviser. That same year, Warsh married Jane Lauder, the heiress to the Estee Lauder cosmetics empire.

In 2006, Warsh, then just 35 years old, was appointed to the Federal Reserve Board of Governors, becoming its youngest-ever member. There, he earned a reputation as a monetary policy "hawk" for publicly criticizing the policies of then-Fed Chair Ben Bernanke.

In response to the 2007-8 global financial crisis, Bernanke adopted an ultra-loose monetary policy, cutting benchmark interest rates as low as possible while initiating large-scale purchases of government bonds.

Following disagreements with Bernanke, Warsh left the Fed in 2011 and subsequently worked in the investment banking sector and at universities.

Warsh boasts a substantial fortune, estimated at around $200 million (€173 million), according to the Office of Government Ethics, a government agency that investigates conflicts of interest involving government employees.

Added to this is his wife's fortune, which Forbes magazine estimates at some $2 billion.

Will Warsh stand up to Trump?

The new head of the Fed brings with him both experience within the central bank as well as an understanding of how Wall Street works and what it wants. It should, therefore, be clear to him that he must avoid creating any impression that the central bank's course is being dictated by Trump.

If that impression takes hold, the markets will react, Rogoff warned.

"If you try to get rid of the central bank's independence, markets say, what are you planning to do? Are you trying to influence us? And they immediately drive up interest rates — which, of course, is the opposite of what the government wants."

Sahm, meanwhile, is of the view that, "up to this point, Warsh has had to impress the president to get the job.”

But now, he must convince the financial markets and the rest of the Federal Open Market Committee that he will lead the central bank well, she said. "It's unlikely that he will keep everyone happy for long."

What will happen to interest rates?

According to media reports, Warsh himself had recently spoken out in favor of lower interest rates — a position fully in line with Trump's views.

This is, however, perplexing, given that the economic environment would seem to suggest the opposite, as inflation is on the rise due to the war in Iran and higher energy prices.

If the Fed were to lower interest rates now, it would likely stimulate the economy, but would also further fuel inflation. Several members of the Fed's 12-member rate-setting committee have therefore already spoken out against interest rate cuts.

So, even if Warsh really wants to slash rates in accordance with Trump's agenda, he would have to convince the committee members to vote in favor of a cut.

Furthermore, outgoing chair Powell — who drew Trump's ire — has taken a rather unusual step, deciding to stay on at the Fed. At his final press conference as central bank chair, he announced that he would remain on the Board of Governors — a move that would give him an unusually influential voice on the body.

Powell's case also shows just how much things can change. Trump, who today calls him "incompetent," a "fool," or even "corrupt," was the one who nominated him for the position of Fed chair in 2017.

This article was originally written in German