WASHINGTON — President Donald Trump’s new pick to run the Federal Reserve spent the years surrounding the greatest financial calamity of his lifetime arguing the country needed to remain vigilant against utterly nonexistent inflation.
During the so-called Great Recession, which caused unemployment to skyrocket and inflation to plummet, Kevin Warsh — then a member of the Fed’s Board of Governors — repeatedly said inflation was lurking around the corner.
“I continue to be more worried about upside risks to inflation than downside risk,” Warsh told his Fed colleagues in April 2009, when the unemployment rate reached 9% and inflation sank below zero.
Warsh, whom Trump nominated to the United States’ central bank on Friday, has seemingly changed his mind about monetary policy – but only after the Republican Party got a new leader in Trump who preferred lower interest rates to high ones. The flip-flop is key to the case against Warsh: He’s more of a political climber than an economic leader, and his loyalty to Trump could undermine the Fed’s independence from political interference.
“He wants to say whatever Donald Trump wants him to say,” Sen. Elizabeth Warren (D-Mass.) told reporters at the Capitol on Friday. “He needs to show some independence. So far, all he has done is shown that he would be an excellent sock puppet for Donald Trump.”
Warsh, who was trained as a lawyer rather than as an economist, was plucked out of George W. Bush’s White House in 2006 to become the youngest-ever member of the Federal Reserve’s Board of Governors at age 35. He is married to the daughter of Ronald Lauder, the billionaire heir to a cosmetics fortune and a major GOP donor who gave $5 million to Trump’s super PAC last year.
For the past year, Warsh has criticized the Federal Reserve, insinuating they’ve kept interest rates too high and blaming them for failing to stop inflation before it started.
“Their policies did a lot of harm, and the president has to dig out from those,” Warsh said on Fox Business last fall. “The Fed’s policies are working at cross purposes with the president’s policies.”
It’s an unintentionally good point — the Fed under Powell has kept interest rates near 4% to fight inflation, while Trump has enacted tariffs that have boosted prices. Still, Trump would prefer the Fed to slash interest rates, reducing the cost of money to boost borrowing and spending.
For now, it appears Warsh’s nomination doesn’t have a path through the Senate, since Sen. Thom Tillis (R-N.C.), a member of the banking committee, has said he’ll block any nominees so long as the Trump Justice Department continues its criminal investigation of Powell.
“Protecting the independence of the Federal Reserve from political interference or legal intimidation is non-negotiable,” Tillis said in a statement.
Still, Tillis described Warsh as a well-qualified nominee. Many Republicans similarly warned about inflation during the Great Recession and its aftermath, even when no inflation was in sight.
The Fed also regulates banks, and Warsh would likely pursue a traditional Republican deregulatory agenda, said Graham Steele, a fellow at Stanford University’s Rock Center for Corporate Governance and former Treasury Department official.
“Should he be confirmed, we’re going to see a continuation of some of the misguided policy this administration is already doing, of weakening the rules that constrain Wall Street, deregulating the financial system in a way that had bad consequences for Main Street like the last time he was at the Federal Reserve,” Steele told HuffPost. “You’ve seen this movie before.”
The Fed jacked up interest rates in response to soaring prices in 2022, betting inflation would come down without unemployment rising — a bet that proved mostly correct, contrary to the expectations of Warren and many economists.
Warsh has lobbed populist criticism at the Fed, while suggesting, if not outright saying, that interest rates should be lower. He’s said that if the central bank sold off some of the financial assets it’s purchased over the years, it would have room to reduce interest rates without causing inflation. He’s also claimed artificial intelligence will put significant downward pressure on prices.
“Americans would benefit from higher take-home pay and greater purchasing power if only the Federal Reserve’s leadership stopped defending its mistakes and started correcting them,” he wrote in a November Wall Street Journal op-ed. “The Fed’s bloated balance sheet, designed to support the biggest firms in a bygone crisis era, can be reduced significantly. That largesse can be redeployed in the form of lower interest rates to support households and small and medium-size businesses.”