What Could the Fed Look Like Under Kevin Warsh?

Yelena Shulyatyeva: Welcome to C-Suite Perspectives, a signature series by The Conference Board. I'm Yelena Shulyatyeva, senior US economist at the Economy, Strategy & Finance Center, and a guest host of today's episode.

Joining me today is John Gardner. He's the head of public policy and research at the Committee for Economic Development, the public policy center of The Conference Board. In today's conversation, we'll discuss what the nomination of Kevin Warsh to be the next Fed chair means for economic outlook, monetary policy, and FOMC structure, as well as the intricacies of the confirmation process.

We'll start things off with John asking me about the economy and interest rates, and then we'll turn the tables.

John Gardner: Elena, thanks very much. Warsh used to be known as someone who strongly focused on fighting inflation, back when he was a governor from 2006 to 2011. They were a resolute inflation hawk. But now he seems more open to cutting interest rates, even though inflation isn't back to that 2% target yet. In simple terms, what changed?

Yelena Shulyatyeva: Warsh believes the economy has changed and in a meaningful way. He thinks businesses are becoming more productive, which means they can produce more without raising prices as much. So things like new technology, AI, and changes in how companies operate after the pandemic helping keep inflation in check, even as the economy continues to grow. At the same time, wage growth has cooled without a big jump in unemployment. That combination, steady growth with slowing inflation—which economists actually call disinflation or prices rising more slowly—that could create room to lower interest rates without crashing the economy.

So in a sense, the neutral rate could be lower, in his view, we think. So Warsh isn't giving up on fighting inflation. He just sees the risks differently now. So his reaction function could be different from what it used to be back in the day when he was a Federal Reserve governor.

John Gardner: Thanks. So if Warsh does become Fed chair, does this mean that the Fed will now lean more towards cutting rates? And is this a short-term move or rather, a longer-term change in how the Fed would think?

Yelena Shulyatyeva: I think I would tend to say this would likely be a short-term adjustment, not a permanent shift. So Warsh would still see controlling inflation as the Fed's top priority, but he appears to believe that interest rates don't need to stay as high right now because productivity improvements are helping keep inflation under control. So that would allow for some rate cuts without losing discipline.

John Gardner: Yeah, but since Warsh has such a strong reputation for being tough on inflation, how might the markets react if he ends up supporting cutting rates? Could that cause confusion or volatility?

Yelena Shulyatyeva: There always could be some confusion, and that could be some initial uncertainty, absolutely, until at least Warsh clearly explains what he's thinking. And we haven't heard from him yet, at least not in the new capacity. But this tough reputation could actually help. If someone is known for being cautious about inflation, that could support lower rates. Markets may take that as a strong signal that inflation pressures have truly eased. In that sense, his credibility could calm the markets rather than unsettle them.

John Gardner: So then, what's your forecast for growth inflation and for policy rates under a new chair?

Yelena Shulyatyeva: I don't think it's any different from what we were expecting before the nomination. We are still expecting slower growth, based on the affordability concerns, the pass-through of tariffs into inflation. But eventually, we should see lower inflation going forward, like in the second half of the year after tariffs pass-through is done. I think we would still see interest rate cuts, but potentially those two cuts that we expected in 2026 would come closer to the end of the year under the new chair, rather than under Chair Powell.

John Gardner: So then, what does the nomination also mean for the structure of the FOMC and how the Fed makes decisions?

Yelena Shulyatyeva: I don't think the new chair would change the Fed's formal structure that much. But you, John, may have some different thoughts about it. It could change how decisions are made in practice.

I think Warsh has been very critical of the Fed for being slow to adjust policy. And he actually called for a "regime change," and I quote. That suggests a stronger, more heads-on chair, probably, who sets clear priorities and drives decisions more forcefully.

So that could also mean less emphasis on building broad consensus and more direction coming from the top. So over time, that may reduce the influence of regional Fed presidents and shift more power toward the chair, even though the basic structure of the Fed stays the same.

I would like to mention one thing, actually, it's specific to Kevin Warsh. He has a history of speaking directly with business leaders and bank CEOs to get a real-time sense of how the economy is doing. That was his practice during the Great Financial Crisis. So, for example, he checked in frequently to understand conditions before they showed up in the data, which could be very useful in the current environment when we get government shutdowns and constant economic data delays. So that could be a useful thing to do. So as long as those conversations compliment the data and include a broad range of voices, this kind of outreach can strengthen decision-making.

John Gardner: We're going to take a short break and be right back with more of our conversation.

Yelena Shulyatyeva: Welcome back to C-Suite Perspectives. I'm Yelena Shulyatyeva, senior US economist at the Economy, Strategy & Finance Center. I'm joined by John Gardner. He's the head of public policy and research at the Committee for Economic Development, the public policy center of The Conference Board. We are going to turn the tables, and I will ask John some questions about the confirmation process.

So John, Sen. Thom Tillis has said he will not confirm any Fed Chair nominee until the controversy surrounding Chair Powell is resolved. How significant is that stance for the confirmation time?

John Gardner: It's a great question. Let me just start by giving a little bit of background on Warsh for those who may not be familiar with him. He's very highly educated and a highly regarded economist. He has a bachelor's degree from Stanford, a JD from Harvard Law School, also took courses at Harvard Business School and the MIT Sloan School. He served on the National Economic Council for President George W. Bush, who also then appointed him as the youngest governor of the Fed in history, where he then served for five years, including throughout the financial crisis.

So under normal circumstances, I think people would say, well, you know, here's somebody who really does have the kind of experience for the confirmation. But as you note, Sen. Thom Tillis, who is a Republican from North Carolina, has said that he will only allow the nomination to proceed when the criminal investigation of Chair Powell that the Justice Department announced is finished with an assessment of either guilt or innocence. Or, as Tillis said, "they can withdraw it because they don't have sufficient basis for a prosecution," unquote, which certainly seems to be Tillis's own perspective here about the investigation. Which is, of course, consistent with what Chair Powell himself had said, that he thought this was about pressure to cut interest rates.

In fact, Tillis doesn't really have any objections that I have been able to find to Warsh on policy. And he wrote to the president, saying that it was a quote, "great pick," unquote. So the issue really is the investigation into Powell.

Now, about the confirmation. The nomination has to go first through the Senate Banking Committee, which would hold a hearing on it. Tim Scott, Republican of South Carolina, is the chair of that. The ranking member is Elizabeth Warren, a Democrat from Massachusetts. 13 Republicans, 11 Democrats.

So assuming that the votes fall along partisan lines, and Tillis refuses to proceed with the nomination, then either they delay the hearing entirely, which I don't think they would do. Or second, if Tillis votes "no," it would be 12 to 12, and the committee would be deadlocked, which also may seem unlikely.

So there are a variety of options, but right now, the nomination could be blocked. That's one option, particularly if Tillis puts a hold on it in the full Senate. Another option is that Tillis could face pressure, with 12 Republicans supporting and only 11 Democrats opposed, to agree to have the nomination sent from the committee to the floor without a recommendation. And there is precedent for this, although it's unusual.

Right now, Senator Thune says that that would be difficult, but things can change. Tillis could also be supported by a senator not on the committee, who is Sen. Lisa Murkowski of Alaska, Republican of Alaska. But in practice, it would take four Republicans to defeat the nomination in the full Senate if all the Democrats vote no. Right now, that seems unlikely, so I would suspect an eventual confirmation. But the timing and the path is a little uncertain.

Yelena Shulyatyeva: That is very interesting, indeed. Thank you. So, my other question is, Warsh has called for a regime change at the Fed that would involve breaking some heads, and that was a quote. How might that rhetoric play in a Senate confirmation hearing?

John Gardner: This is strong rhetoric to be sure, but I do think that any criticism of that would break down pretty much on partisan lines. I think much of the underlying issue here involves not only questions over the Fed's headcount, where there have been suggestions that the Fed simply employs too many people. But really more fundamentally, over the future of the Fed's $6.6 trillion balance sheet.

Warsh has been pretty clear that he thinks the Fed's balance sheet is too high. And while he had initially supported the QE effort early in his term as a governor, he actually resigned from the board in 2011 because of concerns over this policy. And he's criticized what he terms, quote, "monetary dominance," or the dominant feature of the central bank in the economy.

Last July, in an interview on Fox Business, he kind of gave some clues to his future thinking on this by saying, quote, "My simple version of this is, run the printing press a little bit less, let the balance sheet come down, let Secretary Bessent handle the fiscal accounts. And in so doing, you can have materially lower interest rates," end quote.

Which, of course, gets to what you were discussing earlier about the potential future on interest rate policy. So I suspect these questions will be prominent in a confirmation hearing, but I'm not sure they will change any votes.

Yelena Shulyatyeva: I see. OK. Could calls for a sharp internal shift at the Fed raise concerns among lawmakers about institutional independence or governance?

John Gardner: Yes, and I think, again, that this would largely depend on partisan views. And I think it's important to recall here that in an executive order, last February, the president ended the independence of the so-called independent regulatory agencies like the Securities and Exchange Commission or the Federal Trade Commission.

And some of that is being litigated right now, particularly regarding the president's appointment process. The case there is called Trump v. Slaughter, where Rebecca Slaughter, having been a commissioner of the Federal Trade Commission. But it's also important to note that in that executive order, he included the regulatory functions of the board of governors of the Federal Reserve, and exempted only the FOMC and the conduct of monetary policy. But he did so as an exemption, rather than something that was of right or something required by the statute. And this whole question of the legal and practical independence of the Fed is, of course, an issue in the case that just went to the Supreme Court, whether the president can fire Governor Lisa Cook. And we're waiting for the court's decision on that.

More broadly, Warsh has also spoken about the need for a new Federal Reserve-Treasury agreement to replace the agreement from 1951 that really serves as one of the guarantees of the independence of the Central Bank. It's unclear what that might entail. But again, in part some of this comes back to the question of the Fed's balance sheet.

In an interview with CNBC last July, Warsh said that the relationship needed to be redefined. Quote, "We need a new Treasury-Fed accord like we did in 1951 after another period where we built up our nation's debt, and we were stuck with a central bank that was working across purposes with the Treasury," end quote.

And he said that part of the goal of the new agreement would be, quote, "The Fed Chair and the Treasury Secretary can describe to markets plainly and with deliberation, 'This is our objective for the size of the Fed's balance sheet,'" unquote. So again, I do see this, not only in the context of the balance sheet, but also in the context of that executive order and whether the regulatory and other functions of the Fed do, in fact, in some sense, fall under the executive branch or not. So, a lot of questions here, and really more questions than answers at this point.

Yelena Shulyatyeva: OK. Well, that is very interesting, indeed. If confirmation is delayed, what mechanisms are in place to ensure continuity at the Fed, and are those likely to reassure the markets?

John Gardner: I don't want to speculate on the market, but just to get the dates on the record here, Chairman Powell's term ends in May, I think it's May 15, and he also has a right to stay as a governor until the expiration of his full term as governor, which is separate from his term as chair. He was actually confirmed for each role.

His term as a governor expires January 31, 2028. It would be unusual for a chair to stay as a governor, but it is his right. And it could happen. And I think it is, in fact, a possibility, particularly given with what we saw about Governor Cook.

Most immediately, if Warsh is not confirmed by May 15, I suspect that Vice Chair Philip Jefferson would simply serve in an acting capacity. And here I would just note that Jefferson was confirmed by the Banking Committee and by the full Senate, both as a governor and as a vice chair, by strong bipartisan majorities. It was actually 24-nothing in the Senate Banking Committee. So he does enjoy strong support in Congress, and I think that would help if we got to that point where he had to step in as vice chair.

Yelena Shulyatyeva: That was a great conversation. Thank you, John, for being here with me today. Thanks to all of you for listening to C-Suite Perspectives.

I'm Yelena Shulyatyeva, and this series has been brought to you by The Conference Board.