Federal Reserve Chair Kevin Warsh during his first six months in office seems to have done the impossible: He’s kept President Donald Trump happy.
Now, Warsh might need to defang one of his harshest critics, Sen. Elizabeth Warren (D-Massachusetts), who is set to chair the Senate Banking Committee in the next Congress.
Warren derides Warsh as Trump’s “sock puppet,” a jibe that irks him and is contradicted by his raising interest rates despite the president’s insistence that they go lower. She has also lambasted Warsh for allegedly favoring Wall Street over consumers as a Fed governor during the 2008 financial crisis.
Any Warsh charm offensive would be an uphill fight. When the Senate confirmed him in May, he received only one Democratic vote, from Sen. John Fetterman of Pennsylvania. Warsh’s 54-45 margin was the narrowest since the Senate began formal votes on Fed chairs almost 50 years ago.
His official calendar for September lists meetings or phone calls with six lawmakers, all Republicans, including House Speaker Mike Johnson of Louisiana. Warsh’s last recorded appointment with a Democrat was a July 14 phone call with Sen. Mark Warner of Virginia.
“He does not have the same working relationships on the Democratic side. In a way, this is the consequence of the Fed having become so politicized,” said Michael Pedroni, chief executive of Highland Global Advisors, a Washington consultancy.
Inflation delivered Congress to the Democrats in the Nov. 3 midterms. But the real success or failure of the battle to curb the cost of living depends on the central bank, which controls the price of credit.
As Warsh often notes, the Fed has missed its 2 percent price stability target for nearly six years. The latest consumer price data, released on Tuesday, shows it is making little headway. Thanks to a data gap caused by last year’s government shutdown, no official annual figure is available. But economists say prices are now rising at around a 4 percent rate.
That means more interest rate hikes are coming, probably as soon as the Fed’s next policymaking meeting on Dec. 8-9, which will drive up the cost of consumer borrowing.
The good news for Warsh is that Warren, along with other Democrats, have been ardent backers of central bank independence. So Trump’s habit of testing the limits of presidential authority over the Fed will be neutered. A Democratic Senate also is unlikely to confirm any new Fed appointees, meaning the president’s push to oust Fed governor Lisa Cook over disputed allegations of mortgage fraud will probably stall.
A new Congress will not directly affect monetary policy. But Democrats could grill Warsh about his interest in using alternative measures of inflation, some of which show consumer prices rising less than the Fed’s standard metric.
Democrats might also challenge the Fed’s view that the 4.1 percent jobless rate means the economy is at or near full employment. Nearly 2 million Americans have been without work for more than half a year, up more than one-third since Trump took office, according to the Bureau of Labor Statistics.
Warren, who declined an interview, already has clashed with Warsh at public hearings, including this summer when she accused him of seeming “to invite corruption” by declining to criticize Fed Vice Chair Michelle Bowman’s appearance at a private Wall Street dinner on June 17.
“Congress can do things that would make the Fed’s life very, very difficult if they’re not pleased,” said Pedroni, who served in the Treasury Department under President Barack Obama and Trump. “They are going to be using the next two years to audition for retaking the executive branch.”
The 2008 crisis and the pandemic showed that top lawmakers and the Fed leadership need a relationship of mutual trust. When the global financial system is at stake, the people’s representatives need to see the Fed chair as an independent voice on the economy, not just as the president’s man.
“The Fed needs political support from Congress in order to do its job. With a new Democratic Congress, he has to maintain those lines of communication. He needs to be talking to them, on both sides of the aisle,” said Sarah Binder, a political scientist at the Brookings Institution who studies the relationships between the Fed and Congress.
Warsh is not without political acumen. In his 2015 memoir, former Fed chairman Ben Bernanke praised Warsh, one of his closest advisers, for his “political and markets savvy.” During Warsh’s 2006 confirmation hearing to become a Fed governor, Sen. Tom Carper (D-Delaware) read aloud an email from a former Democratic congressional aide praising Warsh as “remarkably balanced, even-handed, thoughtful, and astute.”
Two decades later, in a more politicized age, Warsh prides himself on having the courage to tackle problems his predecessors shied away from or overlooked. He has big ambitions to remake the Fed.
Warsh started by cutting back on communications, believing that since 2008 the Fed has simply talked too much. He’s on solid ground when he says that much of the Fed’s customary public commentary represents habits developed during an economic emergency that are no longer appropriate.
But his less-is-more strategy risks leaving lawmakers in the dark.
The Federal Reserve ultimately answers to Congress, which since the late 1970s has required it to aim for full employment and price stability. Twice each year, the Fed chair is called before Senate and House committees to discuss the management of monetary policy.
Previous Fed chairs have recognized the need for good relations with Congress. In 2013, when Bernanke was leaving the Fed and was asked if he had any advice for his successor, he replied: “The first thing to agree to is that Congress is our boss.”
Warsh’s predecessor, Jerome H. Powell, was known for courting lawmakers, once vowing “to wear the carpets of Capitol Hill out by walking those halls and meeting with members.” Powell, who received at least 80 votes for both of his nominations, said during his first term as chairman that he sought to be “responsive” to lawmakers’ concerns.
“He really spent a lot of time talking to the relevant folks and making sure that they understood what the Fed was trying to do and how the Fed was thinking about things,” said Jon Faust, who was an adviser to Powell and is now a fellow at Johns Hopkins University’s Center for Financial Economics.
Powell’s efforts paid off. When Trump tried to push him out of office by ginning up an exaggerated controversy over cost overruns on a new Fed headquarters, key lawmakers balked. Sen. Thom Tillis (R-North Carolina), a member of the Senate Banking Committee, refused to allow a vote on any Trump nominations — including Warsh’s — until the Department of Justice dropped a criminal investigation of Powell.
Now the Democrats’ return to power will test Warsh’s political skills. It’s hard to imagine Warsh and Warren ever bonding. Both are whip-smart and supremely confident. And while Trump has spared him so far, instead training his ire on Warsh’s colleagues, that could change.
“Could he be squeezed to a certain point between the president and the Congress? Yes, he could be,” said Clay Lowery, executive vice president of the Institute of International Finance. “But that’s kind of the nature of the job.”
The post Fed chair needs friends in Congress as inflation fight drags on appeared first on Washington Post.
