Big Decisions Awaiting the Next Fed Chair
Kevin Warsh—President Trump’s nominee to chair the Federal Reserve (Fed)—has a record that raises serious questions that he should be required to answer before anyone can make a truly informed decision as to his qualifications and suitability to be Chair.
The actions of the Fed affect the lives of every American. From the quantity and quality of jobs to the cost of a credit card, loan, or everyday goods, and the interest you get paid on your savings or checking account, the Fed’s decisions influence the economy in many ways that impact families in their everyday lives. Additionally, through its role in preventing, and if necessary, responding to, financial turmoil and crashes, and in providing Americans with safe, reliable and efficient payment services, the Fed’s many critical responsibilities directly impact the wealth and well-being of all Americans.
While the Fed is often a consensus-driven organization, power at the Fed is concentrated in the Chair who has the most influence over those responsibilities. That is why the process for selecting the Chair should be particularly rigorous. To be both effective and credible, the Fed requires a principled, independent Chair who makes decisions based on data and evidence, not ideology or partisan politics—a policymaker committed to maximum employment and low and stable inflation, financial stability, and strong, effective supervision and regulation of the nation’s largest, most dangerous financial institutions.
Warsh previously served as a Governor at the Fed from 2006-2011, when the pre-2008 crash bipartisan ideology of “markets know best” and weak supervision and regulation enabled—if not incentivized—excessive and reckless risk-taking at Wall Street banks. Those beliefs and actions contributed to causing the worst financial collapse since the Great Depression (see here). Having witnessed the catastrophic consequences firsthand and having been directly involved in the Fed’s response, Warsh should know better than anyone the critical importance of a Fed that makes independent decisions based on facts and data rather than ideologies or outside influence. He also should know just how critical strong bank supervision and regulation are to maximum and broad-based employment, financial stability, and price stability. After all, by November 2009—just 14 months after the bankruptcy of Lehman Brothers—unemployment reached 17 percent, which was more than 25 million Americans at the time. If he is to be an effective Chair, he must see, understand, and believe those hard lessons. The Senate’s confirmation hearing will be an opportunity to determine if that is the case and clarify how he will balance the Fed’s monetary policy responsibilities with its equally critical responsibility to supervise Wall Street and safeguard financial stability.
Since he left the Fed in 2011, Warsh’s positions on monetary policy (promoting employment versus fighting inflation) and financial regulation have shifted in ways that are notable and difficult to explain. While other commentators have analyzed these shifts in detail (see here and here), Warsh has yet to provide adequate explanations that even partially justify such dramatic changes in his views. He must clearly articulate where he intends to focus his time and attention at the Fed and how he will use his position as Chair to ensure the Fed fulfills its mandates to the American people. In particular, if his priorities now differ from his past positions on employment, monetary policy and financial regulation, he should provide a transparent justification grounded in data, changes in economic or market conditions, or revisions to his analytical framework.
Beyond his significant shifts in policy views, Warsh has also demonstrated a concerning pattern of hyperbolic and unsubstantiated critiques of Fed policy and its leadership, which seem to be politically motivated (see here).[1] Effective policymaking at the Fed should not be influenced by political pressures; it must be rooted in facts, independence, and fulfilling the Fed’s Congressional mandates. In light of the current administration’s intense focus on lowering interest rates and ongoing investigations into the current Chair and a sitting Governor, protecting the Fed’s institutional independence is a paramount responsibility for the next Chair.
This Fact Sheet focuses on the decisions awaiting a potential Chair Warsh, specifically the policy priorities and tradeoffs he would face overseeing the Board of Governors and the Federal Open Market Committee.
Affordability Depends on Fed Independence
Americans today face an affordability crisis: essential everyday items cost too much and their prices keep going up, in part due to inflation. The Fed has two key jobs: keep inflation under control and maximize employment. To keep inflation under control—and minimize its impact on prices—the Fed must be credible and that requires it to make independent decisions based on facts and data, not politics or ideology.
As Trump has engaged in repeated, escalating, and increasingly unhinged attacks on the Fed, Republicans, Democrats, financial markets, and corporations have resisted politicizing the Fed because they know the consequences: politically-driven monetary policy decisions will ignite runaway inflation and drive rates much higher for everything from credit cards and mortgages to small business loans. This would be a disaster for our economy and undermine long-term growth, especially for Main Street Americans who already are struggling to afford day-to-day expenses. The next Fed Chair must fiercely protect the institution’s independence from the type of outside political pressure that is being put on the Fed now.
So far, Warsh has spoken consistently about the importance of preserving the Fed’s independence on fighting inflation and maximizing jobs. Of course, those statements will be meaningless if he attempts to push policy at the behest of the White House’s short-term political goals, most immediately in the runup to the midterm elections later this year. Independence requires more than rhetoric; it requires principled decision-making that aims to achieve the Fed’s statutory mandates through facts, data and rigorous analysis rather than shifting political dynamics. Moreover, it is in Warsh’s own interest to uphold the Fed’s independence, since any perception by financial markets that independence has been compromised would ignite inflationary pressures and result in the Fed being forced to raise interest rates in response.
Warsh must be pressed to clearly explain how he would respond to political pressure to lower interest rates or alter regulatory policy for short-term political considerations. The hearing and confirmation process will provide a critical opportunity to establish whether he will defend the Fed’s independence in practice—not just in rhetoric—and whether he will uphold the institution’s statutory mandate to make decisions based on evidence, economic data, and long-term economic stability.
Jobs, Savings and Wealth Depend on Effective Banking Rules
Effective rules and supervision prevent banks from engaging in dangerous, high-risk activities that cause bank failures and financial crises, which cause economic catastrophe for Main Street Americans. The 2023 banking crisis was caused by deregulation and directly cost Americans more than $40 billion and indirectly more than $300 billion. The 2008 crash—again with deregulation a key cause—cost the country trillions of dollars and cost a generation of Americans their livelihoods, as tens of millions were unemployed, 16 million foreclosures were filed, and lost savings, retirement accounts and dreams for many millions more. The devastation to Americans was so deep, broad and long lasting that according to Fed data, 90 percent of Americans were poorer in 2016 than they were pre-crash in 2007. That is what the Fed’s rules and supervision are supposed to prevent; deregulation makes all that happening again more likely, if not inevitable.
As a Governor directly prior to and during the height of the 2008 crash, Warsh experienced firsthand the economic calamity that directly results from woefully inadequate supervision and regulation of large banks.[2] While his statements (see here and here) in the early years after the crash supporting stronger capital requirements for large banks and attempting to end too-big-to-fail were welcome at the time, his current support for the significant reductions in leverage capital requirements, a wholesale weakening of the Fed’s supervisory stress test and the recent so-called Basel III proposals to reduce bank capital are troubling—and, even if viewed charitably, lack any coherence to his prior views. The combination of these deregulatory actions will drastically reduce capital at the largest banks to the levels they had just before the 2008 crash, a fact that should cause Warsh to strongly oppose those actions. Of all people, he understands the devastation that follows when large banks fail due to inadequate capitalization.
Unfortunately, the Fed under the direction of Vice Chair for Supervision Bowman has consistently and intentionally obfuscated the total impact of its deregulation agenda, but Warsh nonetheless should be pressed on these deregulations and the significant and troubling shift in his stance on large bank regulations.[3] Warsh should oversee a better regulatory process that is rooted in the Fed’s safety and soundness and financial stability objectives. Senators should press Warsh on this about-face and demand Warsh use his role as Chair to reverse policy mistakes, bring credibility to the Fed’s regulatory role, and importantly not compromise financial stability for short-term gain.[4]
On community banks (which disproportionately fund the real economy and yet face significantly higher capital requirements than Wall Street banks) Warsh has expressed similar concerns to Better Markets (see here and here) that community banks face significant competitive disadvantages that are driving a reduction in their numbers. However, even here his new positions do not make sense because community banks are actively undermined by Warsh’s recent support to gut large bank capital requirements (see here), which makes the competitive advantage large banks have over small banks even worse. Warsh must explain clearly what has changed in the structure, risk profile, or interconnectedness of the financial system to justify weaker protections for Main Street from Wall Street’s high-risk activities.
The stakes are high to maintain the safety and soundness of the banking system because the failure to do so can result in another financial crisis and the type of large-scale monetary policy actions that have continued since the 2008 crash. A central lesson from the 2008 crash is that effective monetary policy depends on a stable and well-functioning banking and financial system (see here). In fact, the execution of monetary policy is mostly done through banks. If any former Fed official should personally understand this important lesson, it’s Warsh.
Senators must ask hard questions about Warsh’s recent support for wantonly reducing capital requirements and how those positions are consistent with the hard-learned lessons of the 2008 crash. In particular, the Senate should require clear answers about whether he supports requiring strong capital requirements for Wall Street banks, preserving the integrity of the Fed’s supervisory stress test, and ensuring that the Fed’s supervisory authority is used to prevent systemic risk rather than accommodate industry pressure.
Controlling Inflation Price Increases Requires Credibility
If the Fed does not control inflation, then prices go up and Main Street families can’t pay their bills or afford everyday essentials. That requires the Fed to take appropriate action when necessary, even if it is not politically popular or convenient (like in the months before an election). A Fed that does that has credibility—which is the foundation for the Fed to in turn control inflation.
The Fed’s credibility on monetary policy depends on its unwavering commitment to price stability. Following the 2008 crash, Warsh publicly disapproved of the Fed keeping interest rates persistently low (see here). While his repeated concerns about inflationary pressures ultimately proved unfounded, they could be understandable in hindsight given the limited understanding at the time of the effects of the then-new monetary policy tool known as “quantitative easing” in which the Fed purchases large amounts of Treasuries and other assets.
However, Warsh’s recent support for reducing interest rates appears politically-driven given that inflation has exceeded the Fed’s target since March 2021 and he has expressed no clear path or credible plan to return inflation to target. Of note, he has argued that the rise of artificial intelligence will boost productivity and lead to non-inflationary growth. But even if that proves true—and no one will know for a long time—it does not explain his shift in policy in the near-term, since any meaningful effects of artificial intelligence have yet to materialize. The Senate must demand a clear articulation of how Warsh interprets evolving data and how that informs his policy positions, especially his apparent shift in his views on inflation and interest rate policy.
In particular, he should be required to clarify how he interprets current inflation data, how he balances the risks of premature rate cuts against the Fed’s credibility on price stability, and what analytical framework guides his evolving policy positions. To be credible, his answers must be grounded in recognized, independent data, evidence and analysis.
Prioritizing Main Street, Not Enriching Wall Street
The Fed has the authority to take emergency actions by injecting money into the financial system (commonly referred to as “printing money”) to support the economy in times of stress and crisis. That’s what it did before, during and after the 2008 crash (with lots of legitimate criticism as to how, how much, and for the benefit of whom). However, those powers should be used sparingly and only as needed because they have serious distributional consequences. Simply put, they disproportionately enrich the already rich and (arguably) provide modest to little clearly identifiable benefits to most Americans. Additionally, the Fed’s use of this authority creates significant moral hazard—the belief the financial institutions will be bailed out even if they engage in unreasonably high-risk or reckless activities that go wrong. Therefore, this emergency authority used to address financial stress—ostensibly to prevent greater damage—can actually incentivize the very conduct it is meant to address.
The Fed’s balance sheet has expanded dramatically since before the 2008 crash, injecting large amounts of liquidity into banks and financial markets as it creates new money to purchase the assets from banks and other financial institutions. While purchasing large amounts of assets and pumping tons of money into financial institutions helped the Fed manage the immediate aftermath of the 2008 crash, since then the continued large size of the balance sheet has raised serious questions. Warsh has long expressed concerns about the use of asset purchases and the persistence of a large balance sheet long after the financial crisis.
Warsh has argued that the balance sheet—expanded significantly through rounds of quantitative easing during crises—is now “bloated” and distorts financial markets and capital allocation (see here). A more targeted and smaller balance sheet could help return the U.S. financial system to a more market‑driven framework less reliant on frequent central bank support. Better Markets supports a thoughtful reconsideration of the Fed’s approach (see here).
Successive rounds of quantitative easing and the resulting large balance sheet have helped to boost financial asset prices, disproportionately benefiting wealthier households that own the majority of stocks, bonds, and other financial assets, while providing fewer direct benefits to typical wage earners (see here in 2015). This dynamic has made wealth inequality worse and reinforced the perception that monetary policy primarily subsidizes Wall Street rather than helping Main Street.
The distributional effects of these policies also deserve scrutiny from the Senate. Today, the wealthiest 10 percent of Americans own roughly 90 percent of stocks and bonds. Policies that disproportionately boost financial asset prices therefore primarily benefit a small segment of the population, raising important questions about how monetary policy affects inequality and economic opportunity. Warsh should be asked how he evaluates these distributional effects and whether they influence his views on balance sheet policy and financial market interventions.
If Warsh intends to pursue significant changes to the Fed’s balance sheet strategy, Senators must ask detailed questions about how those changes would affect employment, financial stability, market functioning, and the availability of liquidity during periods of stress. Any effort to shrink the balance sheet or reduce reserve levels would raise challenging issues around financial system liquidity and therefore must be accompanied by credible reforms to the discount window and other liquidity facilities to ensure the financial system remains resilient.
Further, it must be emphasized that Warsh’s long-standing preference for a smaller Federal Reserve balance sheet could run headlong into the current Administration’s push for lower interest rates, setting up a potential conflict between balance sheet normalization and monetary easing. Any process to reconsider the Fed’s balance sheet strategy should include a deliberative process that provides ample opportunity for public comment and input.
Conclusion
Warsh’s nomination provides a critical opportunity to examine how he would lead the Fed. He should be asked direct and rigorous questions about whether and how he will defend the Fed’s independence from political pressure, maintain strong supervision and regulation of Wall Street, oppose irresponsible regulations from the Vice Chair for Supervision, and remain firmly committed to the Fed’s mandate to promote price stability and maximum employment.
He should also provide clear answers about his evolving views on monetary policy, financial regulation, and financial stability in light of the lessons of the 2008 crash and the bank failures in 2023. The American public deserves to know whether a Chair Warsh would prioritize long-term economic stability and accountability or weaken the safeguards designed to prevent another devastating financial crisis. Having seen the devastation and damage of the 2008 crash, Warsh knows better than anyone that, as Chair, he must pursue policies to ensure such a catastrophe never happens again.
[1] For example, Warsh points to “climate change” as an area where the Federal Reserve has “neither the expertise nor the prerogative to make political judgments.” In practice, the Fed’s involvement was strictly limited to a voluntary and exploratory exercise to assess the resiliency of large banking organizations’ business models to risks that arise from or are related to climate. Staffing devoted to this issue represented less than one percent of employees assigned to the Division of Supervision and Regulation. Put simply, Warsh is either unwilling to engage with the underlying facts or is deliberately misrepresenting them to support his position.
[2] Warsh supported major bank deregulatory efforts during his tenure as Governor including most infamously the “Basel II” agreement that was ultimately considered such a poor and discredited capital framework that the U.S. agencies largely abandoned implementing the framework after the global financial crisis (see here).
[3] For example, Warsh’s revisionist views on the rapid failures of Silicon Valley Bank and Signature Bank lack coherence and mislead the public (see here). He has claimed they were “hardly systemically significant” when in fact the U.S. government had to guarantee the uninsured depositors via an emergency action (supported by the entire Fed and Federal Deposit Insurance Corporation (FDIC) Boards, including current FDIC Chair Hill, Undersecretary of Treasury McKernan and Vice Chair for Supervision Bowman) to stop a bank run that was rapidly consuming other large banks. In fact, contrary to his blithe assertions, most of the “Dodd-Frank requirements” he cited that would have mitigated the potential failure for those banks did not apply to them (namely, supervisory stress testing, liquidity standards and mark-to-market accounting of securities) due to “tailoring” changes supported by current Vice Chair for Supervision Bowman.
[4] The Fed should not comply with the “Ensuring Accountability for All Agencies” Executive Order (Executive Order 14215) because it would subject the Fed to direct presidential review of significant regulations and interpretations, undermining its statutory independence and mandate to regulate financial institutions based on expertise rather than direct political direction.
