Kevin Warsh has spent years criticizing the Federal Reserve for doing too much. More recently, he has suggested it may need to do the opposite.
That tension will be front and center Tuesday at his confirmation hearing before the Senate Banking Committee, delivering the first real test of how President Donald Trump’s nominee to succeed Fed Chair Jerome Powell could reshape monetary policy at a time when the global economy is already facing seismic shifts.
Warsh’s past comments suggest he wants a leaner, more disciplined Fed, one that places greater emphasis on restraint, and less on communication and the broader powers the Fed assumed in the years after the 2008 global financial crisis, specifically the massive expansion and use of the central bank’s balance sheet.
The hearing will give Warsh, who served as the youngest-ever Fed governor, from 2006 to 2011, the opportunity to reaffirm those plans.
It will also allow him to telegraph his view on what the US-Israeli war with Iran may mean for interest rates this year — whether the Fed should be cutting rates to support a flailing economy, hiking them to battle energy-related inflation, or staying on hold to monitor the global economic fallout.
Before nominating Warsh in late January, Trump said he fully expects whomever he picks to push for lower borrowing costs. However, the Fed is an independent, self-funded institution that sets monetary policy outside of any political influence. It’s a norm that Warsh would be expected to uphold.
Warsh and the balance sheet
The biggest question for Warsh is how he plans to continue reducing the Fed’s $6.7 trillion portfolio — a feat many investors say might be difficult to pull off without sparking a destabilizing credit squeeze.
During the Great Recession under former Chair Ben Bernanke, the Fed made massive purchases of Treasuries and mortgage-backed securities in an experiment to boost the economy’s sluggish recovery at the time. Investors say it was a reasonable response to the financial meltdown of 2008, but the central bank’s three additional rounds of large-scale asset purchases were much more controversial. By the mid-2010s, the balance sheet became an integral part of the Fed’s artillery to fight economic crises, and it began to leave a deep footprint in the financial system, too.
The Fed’s balance sheet swelled again during the pandemic recession, as central bankers acted decisively to stabilize markets and soften the blow to the US economy. By May 2022, the portfolio reached nearly $9 trillion, then it began to gradually shrink as the Fed acted to tame inflation by removing that stimulus from the economy, in addition to hiking rates.
The Fed late last year announced it finished letting the assets on its portfolio expire and roll off, thereby shrinking its total holdings. But around that same time, Warsh said those efforts weren’t enough. He said continuing to shrink the balance sheet can be the key to lower borrowing costs.
“The Fed’s bloated balance sheet, designed to support the biggest firms in a bygone crisis era, can be reduced significantly,” he wrote in an opinion piece published November in The Wall Street Journal. “That largesse can be redeployed in the form of lower interest rates to support households and small and medium-size businesses.”
One way Warsh could make good on that promise is by coordinating with the Treasury Department on the Fed’s asset purchases, in what some have described as a new Treasury-Fed Accord, though Treasury Secretary Scott Bessent rejected that idea last month.
Warsh and rate cuts
While Warsh’s views on Fed policy have done a complete 180, Wall Street still widely expects him to try to figure out an argument for lowering interest rates eventually.
However, doing so now is difficult, after the Consumer Price Index surged in March by the fastest monthly clip since 2022 to an annual rate of 3.3%, the highest in nearly two years.
Even Bessent last week admitted now is not the time to be lowering rates, stating in an interview with Semafor that the Fed should “wait and see” what happens with the Iran war first. Warsh hasn’t commented publicly on Fed policy since his nomination was announced, so it’s unclear whether he now agrees with Bessent, Trump’s top economic official.
Most Fed officials have signaled as much in their recent public speeches — that standing pat is the best strategy for now — including those who wanted rate cuts earlier, such as Fed Governor Christopher Waller, who Trump also considered for Fed chair. Some officials, such as Chicago Fed President Austan Goolsbee, have said there may not be a case to lower rates at all this year.
For Warsh to lower rates, he must get the majority of the Fed’s 12-person rate-setting committee on board. The Fed’s rate decisions are consensus based, and while the Fed chair sets the agenda for each meeting, they do not have unilateral power to push for rates to go one way or the other.
Warsh and staffing changes
In a July interview with Fox Business, Warsh said the Fed is due for “regime change” and that the institution has “lost its way.”
“That’s not just about the chairman; it’s about a whole range of people,” Warsh said. “It’s about changing their mindset and their models, and frankly it’s about breaking some heads because the way they’ve been doing business is not working.”
He added that there’s “plenty of deadwood” at the central bank, hinting that he would trim headcount, should he be confirmed. The Fed chair has the discretion to shrink or expand the central bank’s DC-based workforce of roughly 3,200, so there could be some additional layoffs at the central bank.
Last year, Powell announced a plan to gradually reduce the Fed’s workforce in the coming years to around 2,000, trimming staff 10% each year until that goal is met.
