Kevin M. Warsh’s campaign to become the next chair of the Federal Reserve centered on the premise that the central bank had lost its way.
The Fed had made a major policy blunder in the aftermath of the Covid-19 pandemic that helped to induce the worst inflation shock in four decades. It had intervened in financial markets to such a degree that it distorted the fundamental way in which assets across the world were priced. And, Mr. Warsh argued, the Fed had jeopardized its own political independence by engaging in issues outside of its congressional mandate.
Mr. Warsh’s solution was to call for “regime change” across an institution that had become a magnet for attacks from President Trump over its refusal to slash interest rates.
The pitch worked for Mr. Trump. It also swayed Senate Republicans, who confirmed Mr. Warsh for the top job just days before Jerome H. Powell’s term comes to an end on Friday. Mr. Powell has chosen to remain as one of seven members of the Board of Governors, a decision he made to ward off further encroachments on the Fed.
An assessment of Mr. Powell’s eight-year tenure as chair points to a far more constructive legacy than the one Mr. Warsh portrays, however.
Mr. Powell is remembered as an effective leader who navigated the Fed through an extraordinary series of shocks that put it through grueling tests. He proved nimble when the economic backdrop shifted, managing to forge consensus among the policy-setting Federal Open Market Committee to rapidly adjust rates in both directions.
Mr. Powell’s plain-spoken communication style made him popular across Wall Street, while his frequent trips to Capitol Hill won over lawmakers. He met more than twice as often with senators as his predecessors did, according to an analysis of his calendar.
Mr. Powell leveraged that support this year when he took on Mr. Trump directly to defend the Fed’s independence. That fight has now come to define Mr. Powell’s legacy.
Yet the central bank did make consequential missteps under his watch, ones that left it vulnerable to the criticism voiced by Mr. Warsh.
Mr. Warsh will need to amass his own backers if he is to enact his agenda, a goal that already risks being overshadowed by a worsening inflation problem because of the war with Iran. Resurgent prices have turned officials off rate cuts, potentially putting the new chair in Mr. Trump’s cross hairs if he does not deliver relief.
“Warsh is going to have to repair damage in terms of relations with the board staff and other members of the Federal Open Market Committee, because I doubt they think the Fed is as broken as he implied in his commentary,” said William Dudley, who served as president of the Federal Reserve Bank of New York from 2009 to 2018.
“Do I think the Fed is broken? No, but I do think there are a number of things that the Fed could do better.”
An Inflation ‘Blemish’
Mr. Powell’s legacy might look very different had it not been for the relentless pressure campaign waged by the president, which escalated this year into a criminal investigation.
At the onset of the pandemic, Mr. Powell unleashed the full firepower of the central bank to rescue the global economy and financial system from the brink of collapse. The Fed slashed rates to zero in 2020 and then embarked on a series of interventions, including an unlimited government bond-buying program and historic purchases of corporate bonds and municipal debt. Mr. Powell also took the unusual step of explicitly encouraging lawmakers to turn on the spigots. Congress eventually greenlighted roughly $5 trillion in federal aid.
The economy quickly rebounded. But it was followed by a painful inflation shock, one that became a “blemish” on the Fed, said Charles Evans, who ran the Chicago Fed for 16 years until 2023.
The Fed initially misdiagnosed the extent of the price pressures that had started to build as strong demand fueled by fiscal stimulus collided with constrained supply. The Fed then made blunders throughout 2021 that further delayed it from taking action to quell inflation.
Making matters worse, a year earlier Mr. Powell had unveiled a novel approach to policymaking, one that seemed geared toward addressing the opposite problem from the one the Fed was about to confront. That approach was to temporarily tolerate periods of higher inflation to make up for past stretches when it was too low and to focus on “broad and inclusive” employment.
“It was fighting the last war,” said Kristin Forbes, a former Bank of England official now at M.I.T. “It wasn’t thinking about how the world was changing and the bigger role of global supply shocks.”
Policymakers dispute that the framework held them back from addressing the inflation spike, but the optics were far from ideal. Last year, Mr. Powell scrapped it.
The Fed was primarily hobbled by overly prescriptive so-called forward guidance for raising rates. That, coupled with a promise to first unwind a bond-buying program that many later conceded was excessive, added yet another delay.
Once the Fed began to raise rates in March 2022, Mr. Powell earned plaudits for how aggressively it eventually moved as new risks emerged. Weeks before the Fed’s first increase, Russia invaded Ukraine, sending energy prices soaring. Through July 2023, the Fed raised rates 11 times to a range of 5.25 percent to 5.5 percent, the highest level since 2001.
The scope and scale of the rate increases sent a strong message. So did a powerful speech Mr. Powell gave at the Fed’s annual conference in Jackson Hole, Wyo., that August. Those remarks had been hastily rewritten in the preceding week, when it became clear to Mr. Powell that he needed something that would make an impression. In just over eight minutes, he delivered his version of a mic drop, affirming the Fed’s commitment to taming inflation even if it brought “pain.”
Inflation was not the only issue Mr. Powell grappled with at the time. Multiple policymakers had stepped down after an ethics scandal involving financial transactions executed when the Fed was providing support throughout 2020. Mr. Powell tightened the rules, but the episode left lasting damage. Last August, another governor resigned over her family’s trading activity.
Mr. Powell also had to manage a regional banking crisis that many blamed on the Fed’s own failure in supervising lenders under its purview. The Fed stepped in to stem the panic in 2023.
Despite these missteps, Mr. Powell retained good will across Wall Street and Washington, chiefly because he was pulling off a rare feat: bringing inflation down without causing a recession.
By September 2024, inflation was within spitting distance of the Fed’s 2 percent target, while the unemployment rate remained low by historical standards, around 4 percent. Successive shocks have thwarted Mr. Powell from declaring victory.
“It’s been five years since we’ve had inflation at target,” said Michael Strain, an economist at the American Enterprise Institute. “That’s a problem for the Fed’s credibility.”
Warsh’s Priorities
For Mr. Warsh, the blame lies squarely with the Fed.
Had it developed better models for forecasting inflation, been more circumspect about its market interventions and relied less on broadcasting its next policy moves, the central bank would have been better equipped to manage the shocks over the past eight years, he has argued. The Fed also would have been better off had it not engaged in “mission creep,” delving into topics such as climate change.
To change all of that, Mr. Warsh wants the Fed to rethink its understanding of what drives inflation and how best to measure it. He has proposed that the Fed reduce its portfolio of government bonds and mortgage-backed securities and that there be closer coordination with the Treasury Department on the balance sheet. Mr. Warsh has also said Fed officials should speak less in public.
Many inside and outside the central bank bristle at Mr. Warsh’s use of “regime change.” They counter that the central bank was never distracted by fringe issues, noting, for example, that Mr. Powell established three years ago that the central bank would not be a “climate policymaker.”
Some also suggest the administration’s broadsides against the Fed are costlier than any of the central bank’s missteps.
“The real damage being done is not because of the Fed’s errors,” said Loretta Mester, president of the Cleveland Fed for a decade ending in 2024. “It’s the fact that the Fed is under this vitriolic, consistent attack, and that’s undermining trust in the institution.”
But aspects of Mr. Warsh’s ideas have resonated.
Discussions about how to shrink the balance sheet are already underway. Others are thinking through how to better structure future bond-buying programs. Nellie Liang, who served as a Treasury official and is now at the Brookings Institution, said there was a “legitimate” need to draw distinctions between interventions aimed at market functioning and those related to supporting the economy.
Even Mr. Powell has conceded that there is work to do on communications, although he has not suggested that there needs to be a drastic overhaul.
First Test
As chair, Mr. Warsh will decide which changes to prioritize, but he will need buy-in from his new colleagues to enact them.
Many decisions, including those related to bank regulation, are made by the governors in Washington. The F.O.M.C. — composed of the governors, the New York Fed president and a rotating set of four presidents from the regional banks — votes on rates and other policies.
This setup creates a “push and pull” dynamic that serves as “a check and balance in and of itself,” said Esther George, who served as president of the Kansas City Fed. The outcome has often been a compromise that gives no one exactly what he or she wants.
“Warsh has all of the professional tools to be an excellent Fed chair, but he can’t jump to the moon,” said Randal Quarles, a former vice chair for supervision at the central bank. “You just can’t change the basic fact that you’ve got people on the committee who strongly disagree. That’s a feature, not a bug.”
Mr. Warsh’s first major test will come in June when he runs his inaugural policy meeting. There is scant support for rate cuts, and some policymakers have already suggested that the Fed should signal an openness to raising rates. That leaves Mr. Warsh with a stark choice: Anger the president or undermine his own credibility.
“Warsh wants the history books to reflect that he was a great chair, and that means he’s going to be very intent on not squandering his ability to shape the Fed, which would happen if he were perceived as advocating for things the data just don’t justify,” Mr. Quarles said.
Colby Smith covers the Federal Reserve and the U.S. economy for The Times.
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