Kevin Warsh Makes His Case for Fed Chair

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1:51We'll tell you what it means and who really wins. Open your free iHeartRadio app, search 40s and free agents, and listen now. Bloomberg Audio Studios. Podcasts, radio, news. Name one aspect of President Trump's economic agenda with which you disagree. Well, Senator, the Federal Reserve in recent years has wandered outside of its remit, wandered into other areas. That's not something I'm prepared to do. If I'm confirmed, the Federal Reserve should stay in its lane. On Tuesday, Kevin Warsh, President Trump's nominee to be the next chair of the Federal Reserve, spoke publicly for the first time since being tapped for one of the most powerful jobs in the world back in January.

2:39He faced questions from Senator Elizabeth Warren and other members of the Senate Banking Committee in a nomination hearing that explored everything from his personal finances to his views on economic policymaking. It looks different on TV than it does in person. Bloomberg International Economics and Policy Correspondent Mike McKee was in the room. He says one topic loomed largest, the Fed's independence from outside political pressure and from the president himself. Trump has made clear that he does not want an independent Fed. In fact, he has said, and I quote, Anybody that disagrees with me will never be Fed chairman.

3:16And he's made clear that you are his sock puppet, saying last week that interest rates will drop, quote, when Kevin gets in. Yeah. Changing a Fed chair always leaves open the question of where does the Fed go from here? And at a time when we have a lot of fraught economics questions out there, shall we say, the war tariffs, the overall impact of the president's economic policies, there's a lot riding on this. With a Republican-controlled Senate, it's not so much a question of if Kevin Warsh will be confirmed as Fed chair, but when. And there are still some hurdles in front of a vote on the Senate floor.

3:57Tuesday's hearing was a kind of litmus test for Warsh in the public eye as a Trump nominee. And the committee members wanted to know from the nominee himself, what would a Warsh Fed look like? And would it be able to hold its own as an independent entity as Trump puts pressure on the Fed to cut interest rates? Are you going to be the president's human sock puppet? Senator, absolutely not.

4:24I'm David Gurra, and this is The Big Take from Bloomberg News. Today on the show, Kevin Warsh on Capitol Hill, what his Senate nomination hearing revealed about his ambitions to change the Fed and his willingness to stand up to the president.

4:41Give us a little refresher, if you would, Mike, of who Kevin Warsh is. He's somebody who's been kind of in and out of government over the last few decades. What should we know about him? Well, in and out of government is basically the most important thing besides the fact that he comes from the financial services industry. Then he went to the White House as a member of the National Economic Council before being nominated to the Federal Reserve by George W. Bush. And he then served until 2011 basically as Ben Bernanke's right-hand man during the crisis because of his ties to Wall Street. He left and he went to work for Stan Druckenmiller at Duquesne Capital Management and has been working for him and also teaching at Stanford for the last few years until he was nominated now as chair again.

5:30So he has a lot of experience in the financial world. He also knows a lot of people in the tech world because he went to Stanford and he is friends with a lot of the people that you're talking about every day with AI and with the Silicon Valley world. I'm curious sort of what his reputation is more broadly among Fed policymakers past and present. Well, when he was on the Fed, he was very much a hawk. And he was the one person who was advocating for higher interest rates at a time when the Fed was cutting rates to zero because the economy was falling apart in the great financial crisis. And so he stood out for that.

6:09Once Donald Trump came to office in 2017 and was looking for a new Fed chair, who ultimately was Jay Powell, reappointed, Warsh was a candidate. And at that time, he started to adopt the sort of feathers of a dove, saying that you needed to maybe stimulate the economy a little bit more. And he became certainly more known for that when COVID hit and the Fed was cutting rates and he was in favor of that. Now it seems he's sort of in the middle. When you listened to him yesterday at the Senate Banking Committee hearing, he was talking about the fact that he didn't think tariffs were inflationary, which on the one hand makes Donald Trump happy.

6:52Core PCE inflation has been running at about 3%, a full point above that Fed target, correct? Yes. And so some Federal Reserve officials have said that this excess is due to tariffs. Do you agree with that? Senator, I don't. If I can make two points. Much as we discussed in your office, I think the data that's being used to judge inflation is quite imperfect data. But on the other hand, it's sort of at odds with the way the Fed's looking at it that they are an inflation danger, but a one off. And so the Fed can look through inflation and maybe at some point soon get back to cutting rates. If they're not inflationary, as Walsh says, then we've got a bigger inflation problem than the Fed has been saying.

7:42So a big question at this hearing was, can Kevin Warsh be fully independent from the president? And the president kicked off the day right before the hearing. He was on CNBC indicating he would like Kevin Warsh to lower rates when he gets into the job. How did the senators tackle that question? How front of mind was that for them? It was front of mind, certainly to all the Democrats. But Senator Kennedy of Louisiana, who is a Republican, sort of summed it up in what was clearly a preplanned way to try to get some headlines, asking him if he would be a sock puppet for the president. And, of course, Warsh said, of course, I will not be a sock puppet.

8:19And that's the line that sticks out to everybody. But I think the more important line was when Elizabeth Warren asked him who won the 2020 presidential election. Did Donald Trump lose that election? Mr. Warsh, did Donald Trump lose the 2020 election? We try to keep politics, if I'm confirmed, out of the federalism. I'm just asking a factual question. I need to know, I need to measure your independence and your courage. Senator, I believe that this body certified that election many years ago. That's not the question I'm asking. I'm asking, did Donald Trump lose in 2020? And I'm suggesting you in 2020, the Fed made a...

8:59And Warsh refused to say. And it does show that there is still a weight, a Trump weight, on what Warsh can say or is willing to say. But the takeaway is that and the idea that there was anything corrupt or anything that was wrong with Warsh other than bending to the political winds was about what you got out of that. Kevin Warsh has been a proponent of fundamentally changing the way the Federal Reserve is structured, what it does, what the Fed chair does. Status quo practices and policies are especially harmful when the world is changing this fast. What was your sense of how receptive members of the committee are to that reform agenda that Kevin Warsh, yes, talked about during the hearing, but has talked about over the course of his long career?

9:43Well, I think it depends on the political party and there isn't a lot of depth on either side. Warsh has made it clear that over the years that he thinks the Fed has strayed out of its lane, as he put it, and gotten into fiscal or social areas that don't fall under the Fed's remit like climate change. What may be more interesting to the people in the markets, and I don't know how much depth – you never know quite what the senators understand about monetary policy. But the idea that he would maybe want to change the communication strategy and get rid of the dot plot, which he suggested is misleading, and maybe change the Fed's inflation index.

10:26Those things could turn out to be the most important things he wants to do along with shrinking the balance sheet. And those didn't get as much questioning. The balance sheet didn't get much at all because perhaps the senators aren't up on that or as interested in the technical details of being on the Fed. If Kevin Warsh were to be confirmed, he would be one of the wealthiest Fed chairs in history. He's married to the granddaughter of Estee Lauder. She's a billionaire. He disclosed assets worth more than$100 million, and this is something that came out during the course of the hearing as well.

11:01Mike, help me understand what more senators want to know about Warsh's financial ties. This was another line of questioning that Elizabeth Warren really pushed was, what have you invested in? His financial disclosure forms probably understate much of his holdings, and they basically just tell you in broad strokes what they've invested in. He said he had an agreement with the Office of Government Ethics to sell off his assets to the extent that he can before he takes office, which would be a Herculean task perhaps. But he said he's going to do that, but he would not disclose what those investments necessarily were.

11:40And he said the OGE said, that's fine. You don't have to. And so he stonewalled on that question. But obviously the undertone of the question is who else might you be beholden to or who else might you be trying to help through monetary policy? We should mention, as you did, that his wife is an heir to the Estee Lauder fortune, and he has promised to recuse himself from anything that would, in theory, have an impact on Estee Lauder, although it's kind of hard to know how that works, given that even lower interest rates would help any company, including Estee Lauder. Senator Tom Tillis, a Republican member of the Banking Committee, has threatened not to vote for Kevin Warsh if the Trump administration doesn't drop its investigation into current chair Jerome Powell over renovations to the Federal Reserve's headquarters in Washington.

12:32Tillis said he had just one actual objection to Warsh himself. Let's get rid of this investigation so I can support your confirmation. Mr. Warsh, the only thing I've found the least bit odd about you is you've never watched an episode of Seinfeld. Seinfeld aside, is Tillis's stance here a threat to Warsh's confirmation? It's a continued threat to the when part of his confirmation. It's not a threat to the will he be confirmed. He has the votes. The Republicans are solidly on his side. But Tillis, he used his entire time to rail against the investigation that the administration is conducting into Jay Powell and the Fed over the building renovations.

13:14And he's very dug in on the idea that unless that is dropped, he's not going to vote for Kevin Warsh. There are about nine days left, nine legislative days left to vote him out of committee and then on the floor confirm him. So there's a growing chance that he won't be confirmed because of Senator Tillis's opposition in time to take over right when Jay Powell's term is up, which is on May 15th. So what would happen if Warsh is not confirmed in time? And what signals has President Trump sent about what he wants his Fed chair nominee to do? That's next.

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17:02Kevin Warsh would face a Republican-controlled Senate if his nomination moves from committee to a floor vote. But there's an ongoing stalemate. GOP Senator Tom Tillis of North Carolina says he'd refuse to vote for Warsh or any Fed nominee until the Trump administration drops a Justice Department investigation into renovations of the Fed's headquarters in Washington. Tillis holds a deciding vote on the Senate Banking Committee and said he would be prepared to support Warsh if the probe is dropped. I asked Bloomberg's Mike McKee about how that could play out. Well, it's not clear that it would go forward once Warsh is confirmed, because that assumes that Senator Tillis is happy with the idea of the investigation being dropped.

17:43And Jay Powell says he's not going to leave the Fed unless the investigation is dropped with prejudice, which is the legal term for you can't file it again. And so I'm not sure that Warsh will really inherit this issue. He'll inherit the buildings. But you have to realize the president is vastly exaggerating the cost overruns of this, saying$4 billion or over. The cost overrun is about$600 million at this point, which for Washington for buildings these days and given the age of those buildings is not completely out of line. But there isn't a whole lot of evidence that there is anything there. So the first question is, why doesn't the president just call Jeanine Pirro, the district attorney, the U.S.

18:27attorney in Washington and say, drop the case? I want Kevin Warsh in there. And the other is a possible compromise where maybe the Senate Banking Committee conducts its own investigation. That's been floated by some. Senator Tillis said yesterday maybe that's an idea. But the president seems dug in on this, which is it confuses everybody because it doesn't get him what he wants, which is Jay Powell out of the chair's job. Mike, you've been following over the last few years the president's antipathy toward the current chair of the Federal Reserve and the attacks that he's made on the Fed's independence.

19:03And I'm curious if I could ask you maybe to step back and explain what the actual effect of that has been on the institution. How has the president openly seeking to oust the head of the Federal Reserve affected the willingness of, say, other governors, other policymakers to break with the president? Well, you have to take Governor Stephen Myron out of it because he was appointed by the president basically to uphold the president's views. I've talked to Stephen Myron a lot, and I think he really believes those views. So it's not that he's going against his own beliefs. I think the rest of the Fed has not been affected at all in terms of doing their job.

19:39But when you talk to people at the Fed, they're certainly weary of it. They're tired of being the punching bag. Kevin Warsh was talking about how the Fed talks too much and is out there too much and too many people rely on it and it's become this all-purpose safety valve for the economy. Well, they can't get away from that because they keep getting pushed into the spotlight by things the president says. It certainly hasn't affected Jay Powell other than the weight of being a punching bag all the time. Now the question is, Kevin Warsh going to get that if he doesn't do what the president wants?

20:14And how would that affect Warsh? I suspect he'll get a little bit of a pass from the president, but he's not going to be happy if he doesn't get lower interest rates, no matter who the chair is. Mike, I want to turn now to what's next for the outgoing Fed chair for Jerome Powell. His term as chair scheduled to end on May the 15th. He said he'll stay in the job if Kevin Warsh isn't confirmed by then. He could stay on the board as a Fed governor till January of 2028. Were he to do that, what kind of influence would he have at the Fed as a governor? Has he given any indication as how he would operate from that position?

20:47He hasn't. It's only been recently that he's talked about staying on. It was at the last press conference when he said he would remain as the chair pro tem until Warsh were confirmed and that he would not even consider leaving the board until the investigation is dropped. It's been tradition that Fed chairs, even if their term as governor is up, resign when a new chairman comes in. But if he wants to stay on, it would be an interesting situation because the Fed as it's now constituted is basically a Powell Fed. People who've been working with him for a very long time and they all respect him and they all think that what he says and his ability to get consensus is very strong.

21:34So Wall Street will be saying, well, who's really running the Fed if that's the case? Powell says he will make his decision based on what's best for the institution and the United States rather than for himself. So if he thinks that Kevin Warsh or the president was trying to assert undue pressure on the Fed. Maybe he might stay even if the investigation is dropped. So we're not really clear on what's going to happen with Powell. The president has once again raised the specter of trying to fire Jay Powell if he were to stick around past that May 15th deadline. You're not a lawyer. I'm not a lawyer.

22:11But what legal grounds does he have to do that? How hard fought would that be? I didn't even stay at a Holiday Inn Express last night, so I have no legal qualifications. It would be very hard, though, because the Federal Reserve Act says you could only fire a governor for cause. Now, the possible cause is this investigation. But remember, there's no charges here. There's only a cost overrun and some thoughts by the president, some innuendo that maybe Powell profited by this. So unless there's something like that, it's going to be harder to do. Now, We're all waiting on the Lisa Cook case, and we're all waiting to see if she is indeed allowed to stay on the Fed.

22:53If the Supreme Court says that she can, that undercuts the president's ability to fire somebody based on innuendo because there's no charge against her either. So it's going to be very hard for the president to do that. He's got a better chance of maybe making nice to Jay Powell and getting him to resign than he would with firing him or attempting to do so.

23:22This is The Big Take from Bloomberg News. I'm David Gura. To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at Bloomberg.com slash podcast offer. Thanks for listening. We'll be back tomorrow.

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