There was one question hanging over the room during Tuesday’s meeting of the Senate Banking Committee. According to the hearing schedule, the gathered senators were there to adjudicate Kevin Warsh’s nomination to become the next chair of the Federal Reserve Board of Governors. Matters of monetary policy were discussed, but the focus would inevitably return to whether Warsh, if confirmed, would stand up to President Donald Trump and ensure the independence of the Fed from political pressure.
Though it may seem counterintuitive, Warsh’s desire to be entirely nonpolitical potentially undermines the independence the Fed requires.
It’s an issue that barely came up in the most recent confirmation hearings for a new chair, nine years ago. The good news is that Warsh was adamant about having no interest in merely doing Trump’s bidding as chair. “I do not believe that independence of monetary policy is threatened when elected officials state their views on rates,” Warsh declared in in his opening remarks. “Fed independence is up to the Fed.”
Much more troubling, however, was Warsh’s response to a simple question from the committee’s ranking member, Sen. Elizabeth Warren, D-Mass: “Did Donald Trump lose the 2020 election?” It is not the sort of complicated economic issue that he’d expect to oversee, though it still had a simple factual answer. But Warsh refused to provide a direct response, only saying that “this body certified the election many years ago.”
It’s not encouraging given the pressure Trump has placed on Warsh’s predecessor and the current Fed Chair Jerome Powell. The president’s repeated demand for the Fed to lower interest rates itself shows why central banks like the Federal Reserve require independence. Cheaper credit for consumers and businesses is great in the short term for any politician, especially when rising prices are being used as a political hammer against you. And Trump is even more focused on immediate gratification over long-term planning than most.
Elected officials are always focused on the next campaign cycle, but central banks are meant to have a longer-range vision of the economy and monetary policy. It’s only through their independence that banks are able to credibly say that their focus is on stabilizing inflation, versus making short-term gains to please their political patrons.
A recent study from the European Central Bank showed a correlation between independence and credibility. Credibility in turn keeps businesses and financial institutions confident in a country’s economic stability.
Though it may seem counterintuitive, Warsh’s desire to be entirely nonpolitical potentially undermines the independence the Fed requires. He has stated in the past that he thinks the Federal Reserve has strayed too far into addressing politically charged issues such as climate change. In a speech last December, he said that “people of good conscience have their own views and motivations on the matter,” but “has neither the expertise nor the prerogative to make political judgments in these areas.” That may be true, but there are experts who have made the factual judgement that the world is warming, and it would be foolish to ignore them.
Though Warsh’s statements were deeply apolitical in tone, the reality is that ignoring climate change in determining long-term monetary planning is itself a choice with political ramifications. He refused to confront questions about the inflationary effects of climate change from Sen. Tina Smith, D-Minn., in his hearing. Climate change is an issue that can’t be ignored if your goal is to be a credible arbiter of how strong the dollar is in the coming decades.
The same is true of dodging Warren’s questioning about the 2020 election, which Warsh tried to justify by indicating he’d want to keep politics out of the Federal Reserve if confirmed. The issue is that it’s no longer entirely his choice. Politics has come to the Fed, and it will be the job of its next chair to navigate the waters the president has churned up.
Keeping his head down is unlikely to be sufficient for Warsh to withstand pressure to make quick actions, especially as current members of the board see their terms end or face attempts to push them out of their seats. If Warsh is unwilling to address a factual matter like the results of the 2020 election, it does nothing to ease the concerns Warren and others have about his resolve to maintain independence in the face of far more complex issues.
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