Kevin Warsh Faces Confirmation Fight Over Fed Nomination Amid DOJ Investigation Controversy

Kevin Warsh, President Trump's nominee to serve as the next chair of the Federal Reserve, faces a tough fight for confirmation — partly over events for which he has no control. The Senate Banking Committee held 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 was also quizzed 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 takeaways from the Senate hearing — and the looming confirmation fight.

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. "If we put everybody in prison in federal government that had had a budget go over, we'd have to reserve an area roughly the size of Texas for a penal colony," Tillis said at Warsh's hearing. The DOJ has promised to appeal the judge's decision. By dropping its probe, the administration could win Tillis' vote and clear the way for Warsh's confirmation. But that hasn't happened yet.

Warsh is arguing 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 interest rates for fear inflation might get out of control. But recently, he's argued that the central bank may be able to lower interest rates while still keeping prices in check. "I think the economy's potential is growing quite quickly," Warsh told senators, suggesting that productivity gains from artificial intelligence would give the Fed more leeway to lower rates. 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. "Trump's economic failures are causing him political problems and he wants the Fed to use monetary policies to artificially juice the economy," Warren said at the hearing. 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. Warsh insisted that he'd made no promises to Trump to lower rates, nor had the president asked for such an assurance. 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 the resulting spike in gasoline prices have 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, a point he reiterated at his confirmation hearing. 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.