The 1 Question That Will Dominate Kevin Warsh’s Fed Nomination Hearing

The main thing that senators, Wall Street and the White House want out of Kevin Warsh’s nomination hearing for Federal Reserve chair on Tuesday is to know whether he will bow to President Donald Trump.

Warsh was selected for the government’s most important economic post by a president who has aggressively made it clear that he wants much lower interest rates. Trump’s vow that he would only pick a central bank leader who would cut borrowing costs — alongside his repeated threats to fire outgoing Chair Jerome Powell — guarantees that questions about the Fed’s autonomy will outweigh anything Warsh is likely to say about interest rates or the economic fallout from the war in Iran.

And the nominee will be contending with the competing goals of two audiences: convincing senators that he’s committed to protecting the central bank's independence, without angering Trump.

“Both Republicans and Democrats will probably have good, real questions for him,” Sen. Mike Rounds (R-S.D.), a senior member of the Banking Committee, told reporters. “It’ll be a lot on Fed independence.”

A former committee staffer, granted anonymity to speak candidly, put it more bluntly: “The key question would be: ‘If he tries to fire you, are you leaving? Jay Powell stood up to this attack. Would you?’”

The hearing before the Banking Committee will be the first time Warsh will speak publicly as the nominee about taking a job where his predecessor has been continuously attacked in the most personal terms by Trump, who's trying to bend the central bank to his will. The administration has also been conducting an investigation into the Fed’s headquarters renovations, a probe that Sen. Thom Tillis (R-N.C.) sees as a politically motivated effort to undermine Fed independence. Tillis is holding up Warsh’s nomination vote until it concludes.

Warsh’s remarks will also come as the country awaits a decision from the Supreme Court on how much authority the president has to fire Fed board members for alleged misconduct, a potentially historic ruling that will determine the scope of White House pressure that can be brought to bear on the central bank.

Warsh, for his part, will underscore both his commitment to setting rates without regard for short-term political considerations and to keeping inflation in check. In an opening statement obtained by POLITICO, he says monetary policymakers must make decisions based on “analytic rigor, meaningful deliberation, and unclouded decision-making.”

Questions about the Fed’s independence took on fresh urgency last week after Trump told Fox Business’ Maria Bartiromo that he would try to dismiss Powell if he doesn’t leave the central bank “on time.” Powell’s term as chair is scheduled to conclude May 15, but he says he’ll stay on until a successor is confirmed. He has also left open the possibility that he’ll remain on the central bank’s board through 2028 — when his term as a Fed governor expires.

The timeline of Powell’s departure has been thrown further into doubt by the Justice Department investigation into the central bank’s yearslong, $2.5 billion headquarters renovation, a probe that Powell says is a pretext for pressuring him to lower interest rates. Tillis wants the administration to wind down that probe.

“I’m not going to spend time talking to Mr. Warsh,” Tillis told reporters of the hearing. “I’m fine with his credentials. I’m going to spend five minutes talking about the lunacy of this investigation.”

Warsh’s performance on Tuesday will help determine whether he can clear the Senate, where he enjoys broad support from the GOP caucus but might get few if any Democratic votes. He will have to speak simultaneously to both Republican senators like Tillis who value the Fed’s insulation from politics, and Trump, who wants lower rates to boost the economy and the housing market.

On both points, Warsh’s prepared testimony is instructive.

He argues that the Fed’s independence is not “particularly threatened when elected officials — presidents, senators, or members of the House — state their views on interest rates.”

He also says that while the Fed should be “strictly independent” when it comes to interest rates, that level of deference does not apply to other areas, such as bank regulation, international finance and the “stewardship of public monies.”

But he also implicitly pushes back on the idea that he might lower rates under any circumstance, pledging his commitment to keeping prices stable.

“Inflation is a choice, and the Fed must take responsibility for it,” Warsh says in his prepared statement. “Low inflation is the Fed’s plot armor, its vital protection [against] slings and arrows.”

Warsh, who was previously a member of the Fed’s board and a key deputy to then-Chair Ben Bernanke during the 2008 financial crisis, has a track record of speaking about the importance of the institution’s independence. In a 2010 speech, he said, “central banks must take their own counsel when deciding upon the timing and force” of rate cuts.

His allies expect him to point to such prior remarks to bolster his argument that he will set rates with a view to what’s best for the economy.

Beyond that, Warsh is unlikely to give many specific answers. He has often criticized Fed officials for talking too much about their thoughts on the implications of economic data for the Fed’s two mandates — price stability and maximum employment — and what they might mean for the next rate decision.

When it comes to Fed nomination hearings, “usually the good strategy is to say nothing, to give a nod to the dual mandate and to say it’s important to get inflation back to target,” said Sarah Binder, a George Washington University professor and Brookings Institution scholar.

Meanwhile, it’s unclear whether he will engage with questions about the Justice Department’s probe of the headquarters project, an investigation that could drag out his confirmation timeline but continues to be backed by Trump.

In an appearance on CNBC on Monday, White House National Economic Council Director Kevin Hassett said that once Warsh is confirmed, “everybody who wants to find out about all the cost overruns and everything else that’s been going on over the last couple of years will of course be able to do so because we’ve got a Fed chair there who people trust,” he said.

White House spokesperson Kush Desai said in a statement that “Warsh’s academic credentials, private sector success, and prior experience on the Fed Board of Governors make him eminently qualified to restore confidence and competence in Fed decision-making,” and that the administration is focused on working with the Senate to assure he’s “swiftly” confirmed.

The DOJ investigation, along with the president’s repeated attacks on Powell and his attempt to dismiss Fed Gov. Lisa Cook over unproven allegations of mortgage fraud — a case now before the Supreme Court — have also complicated Warsh’s ability to secure bipartisan support for his nomination.

Powell was backed by a majority of Democrats both times he was nominated for Fed chair. It’s unlikely that Warsh — an alum of President George W. Bush’s administration who has spent his post-Fed career cultivating ties across Wall Street and Trump’s orbit — will see similar levels of support.

Sen. Elizabeth Warren of Massachusetts, the committee’s ranking Democrat, has already signaled that she plans to grill Warsh over his complex financial holdings, and says she has deep concerns that “he will be Donald Trump's sock puppet” if confirmed.

Sen. Mark Warner (D-Va.) — a moderate on the committee with regard to financial policy — has also said it “is difficult to trust” that anyone selected by Trump will “be able to act with the independence required” to be Fed chair, though he has not ruled out voting for Warsh.

Trump’s latest attack on Powell will make “it a lot harder for Kevin Warsh to get a Democrat to vote for him,” said Skanda Amarnath, a former Federal Reserve Bank of New York researcher who’s now the co-founder and executive director of Employ America.

And even if moderates on the committee had been willing to vote for his confirmation, “it would not look great if they’re seen as endorsing the person that Trump’s trying to strongarm into the job for the purposes of more political control over the Fed,” Amarnath said.