The US Senate has confirmed US President Donald Trump’s nominee Kevin Warsh to lead the Federal Reserve, bringing new leadership to the world’s most powerful central bank at a fraught moment for the global economy.
Mr Warsh, 56, a lawyer, financier and former central-bank governor, will take over as inflation rises and markets grapple with the likely course of central bank policy, while Mr Trump demands lower interest rates.
A surge in oil prices since the start of the Iran war has swung investor expectations toward a possible rate increase by year-end.
The Fed’s current target range for short-term borrowing costs is 3.50-3.75 per cent.
Trump nominates Kevin Warsh as new Fed chair
The Senate confirmed Mr Warsh to a 14-year term as Federal Reserve governor and set the path for the vote to approve him for a concurrent four-year term as Fed chair.
Mr Warsh was confirmed in a largely party-line vote.
His nomination had been thrown into doubt in recent months after Republican Senator Thom Tillis of North Carolina said he would block the nomination while the Justice Department investigated Fed Chair Jerome Powell.
The Powell probe was dropped in April, clearing the way for the Senate to confirm Mr Warsh.
His swearing-in to both positions awaits final White House signatures on paperwork sent by the Senate.
Mr Powell’s term as chair ends on Friday, local time.
Plan for ‘regime change’ at the Fed
Mr Warsh said he planned “regime change” at the Fed, including tightening its coordination with the Treasury Department and the Trump administration on non-monetary policies and setting it on course for a smaller balance sheet, which he argues should allow for a lower policy rate.
US Senate Majority Leader John Thune urged colleagues to support Mr Warsh, saying it was critical that a Fed chair “understand not only the macro” but also “appreciate the microeconomy, and that’s the hardworking Americans, their jobs and their livelihoods”.
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Mr Warsh, a former top Fed official, will become chair at an unusually difficult time for the independent agency.
Inflation has topped the Fed’s 2 per cent target for five years and is now rising faster because of spiking fuel prices.
The Fed’s interest rate-setting committee is divided and saw the most dissenting votes in more than three decades last month.
And Mr Powell, after years of personal attacks from Mr Trump and an unprecedented legal investigation by the Justice Department, plans to stay on the Fed’s board even after his term as chair ends, potentially creating a competing power centre.
Donald Trump has made many public attacks at Jerome Powell. (Reuters: Kent Nishimura)
Trump demanded change at the Fed
The Fed has faced numerous threats to its independence from Mr Trump, who has repeatedly attacked Powell for not cutting interest rates.
Trump also sought to fire Fed governor Lisa Cook and launched an investigation into brief Senate testimony by Powell on a building renovation.
Kevin Hassett, director of the White House’s National Economic Council, said in a Fox News interview on Sunday that he believed the markets are relieved that Mr Warsh “is going to help lower interest rates over time”.
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In December, Mr Trump said on his social media platform that he wanted a Fed chair who would cut interest rates when the stock market rose — the opposite of what traditional economics would prescribe — and added, “Anyone who disagrees with me will never be the Fed chairman!”
Mr Trump’s comments have fuelled concerns that Mr Warsh will set rates based on economic conditions or seek to cut rates to appease the US president, even if doing so could worsen inflation.
At Mr Warsh’s confirmation hearing last month, Democratic Senator Elizabeth Warren derided him as a “sock puppet” for Mr Trump.
Mr Warsh declined to say that Democrat Joe Biden had won the 2020 election against Mr Trump, who has falsely claimed that voter fraud cost him re-election.
But Mr Warsh denied at the hearing that Mr Trump had pressured him to reduce the Fed’s key rate.
“The president never once asked me to commit to any particular interest rate decision, period,” he said at the time.
“Nor would I ever agree to do so if he had. I will be an independent actor if confirmed as chair of the Federal Reserve.”
A critic of the Fed’s leadership in the past
Mr Warsh has been highly critical of the Fed’s recent track record, particularly the inflation spike in 2021-22, the worst in four decades, and has called for “regime change”.
He has provided only broad outlines of what that change would involve.
He has called for limiting the Fed’s communications, which would be a sharp shift after decades of increasing transparency.
And Mr Warsh has argued that some of its communications tools, such as quarterly forecasts of where its key rate may head, have made it harder for officials to switch gears.
Kevin Warsh has come under fire for not fully disclosing details of his extensive wealth. (Getty Images: Bloomsberg)
Senate Democrats have also condemned Mr Warsh for not fully disclosing details of his extensive wealth, which disclosures show amount to at least $US100 million ($138 million).
His investments include stakes in Polymarket and SpaceX, but he hasn’t revealed how large those holdings are.
He promised to sell all such assets within 90 days of being sworn in.
“He will be the wealthiest Fed chair in history, but he refuses to provide transparency to the American people about who he is entangled with,” Ms Warren said.
Difficult economic conditions
The Fed is still grappling with how to respond to the 50 per cent spike in fuel prices from the Iran war, which has boosted inflation to reach 3.8 per cent in April.
Congress tasks the US central bank with keeping prices stable, which it seeks to do by raising its short-term rate to make borrowing and spending more expensive, cooling growth and inflation.
The Fed typically looks past temporary price increases stemming from supply disruptions, such as the war’s cut-off of oil through the Strait of Hormuz, because those prices typically level off, or even fall back once supply is restored.
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But the Fed also followed that approach after the coronavirus pandemic snarled global supply chains, lifting prices for goods like cars, furniture and electronics.
Inflation turned out to last longer than expected, and Mr Powell and other Fed officials acknowledged they waited too long to raise rates. Inflation surged to 9.1 per cent by June 2022.
The Fed’s rate-setting committee has kept rates unchanged for three straight meetings, as it evaluates the impact of the gas price spike.
At its most recent meeting last month, three members of the committee objected to language that suggested its next move would be a rate cut, saying they preferred more neutral language that would allow for a hike.
Many Fed watchers saw those dissents as a warning shot to Mr Warsh that he won’t be able to easily engineer rate reductions.
Reuters/AP