Jerome Powell is leaving and the US Senate has just confirmed his successor
Kevin Warsh was narrowly confirmed by the Senate on Wednesday to serve as the 17th chairman of the Federal Reserve, inheriting a central bank that has long been under political attack from US President Donald Trump and an economy shaken by geopolitical tensions that are driving inflation.
Warsh will formally succeed Fed Chairman Jerome Powell, whose eight-year term was marked by several economic crises and a heated confrontation with the White House to defend the political independence of the American central bank.
Warsh was confirmed by a vote of 54 to 45, in a vote mostly split along party lines, with only Democratic Senator John Fetterman of Pennsylvania voting in favor of Warsh’s nomination. It was the most partisan vote for a Fed presidential nominee in history, highlighting discomfort among Democrats with Trump’s fight against the Fed, although Republicans generally welcomed Warsh’s leadership.
Warsh is widely seen as more aligned with President Donald Trump, who has long called for interest rate cuts but will take office at a time when inflationary pressures are intensifying due to the U.S.-Israeli war with Iran. Inflation jumped to the highest level in three years in April, according to the latest Consumer Price Index, and now outpaces wage growth.
The energy shock is complicating expectations for a quick interest rate cut, with investors now expecting the Fed to keep its benchmark interest rate unchanged for the rest of the year – or even raise rates if inflation worsens. That prospect is likely to frustrate Trump, who may direct his ire at Warsh in the same way he did Powell. The president even joked earlier this year that he would sue Warsh if he didn’t cut rates.
Either way, the Fed chairman represents just one vote on the Federal Open Market Commission (FOMC), which reviews changes in interest rates. Although Warsh controls the agenda for all Fed meetings, he will not have unilateral authority over what the majority of the body decides. To date, there is a faction of political decision-makers with voting power who have signaled serious concerns about inflation.
What can we expect from Warsh?
The Warsh era at the Fed is expected to bring several changes to the institution.
The future president of the Fed proposed or hinted at reducing the size of the Fed’s balance sheet, currently at 6.7 billion dollars; closer coordination with the Treasury Department regarding the balance sheet; reducing the number of monetary policy meetings per year from eight to just four; holding fewer press conferences; reducing the number of Fed staff in Washington; and the interruption of frequent disclosures on the trajectory of interest rates. According to JPMorgan analysts, all of these changes would be within Warsh’s scope of action as president.
The most challenging policy change for Warsh may be balance sheet related. Warsh has repeatedly said for years that the Fed should reduce its presence in financial markets, shrinking its balance sheet to allow central bankers to focus primarily on their traditional tool – the key interest rate – to combat high inflation and high unemployment.
After the Great Financial Crisis and again during the pandemic, the Fed purchased millions of dollars in assets such as Treasury bonds to support the economy, a policy known as quantitative easing.
Warsh believes that such policies undermine the Fed’s independence, since they essentially amount to guaranteeing government support. He argues that the central bank should accelerate the liquidation of its billions in reserves, which include mortgage-backed securities and government bonds, as quickly as possible.
A turbulent path to the top
Trump’s search for a new Fed chairman lasted several months and ended in a grueling confirmation process, which was stalled for a time by a key Republican – North Carolina Senator Thom Tillis – who demanded that the Justice Department end an investigation into Powell related to testimony the Fed chairman gave to Congress last year about the cost overruns of a renovation project at the Fed’s headquarters in Washington, D.C.
The Justice Department’s investigation fueled fears that the Trump administration was trying to undermine the Fed’s independence, which would pave the way for political interference in setting interest rates in the world’s largest economy.
Powell had strongly criticized the investigation, calling it politicized, and saying in a video statement that the investigation was a consequence of broader “continuing threats and pressure” from the government.
The investigation, led by Washington DC federal prosecutor Jeanine Pirro, was eventually shelved, although Pirro said he could reopen it if the Fed inspector general finds evidence of irregularities or negligence.
Warsh’s first meeting as Fed chairman is scheduled for June 16-17, with former Fed Chairman Powell retaining a seat as a member of the Board of Governors for now. At his last press conference as president last month, Powell congratulated Warsh and said he would support him in whatever way he could, while stepping out of the spotlight to allow the future Fed chairman to govern.
Fed chairs typically step away from the board completely after leaving central bank leadership, but Powell has said he will stay on until he considers the Pirro investigation fully complete. The only other former Fed president to remain in office was Marriner Eccles, in 1948, who remained on the board for a few more years.
