Former Fed Officials Express Cautious Approval of Kevin Warsh as next Central Bank Chairman
The front entrance of the Marriner S. Eccles Federal Reserve Board building built in 1937. (Courtesy of the Federal Reserve)
Kevin Warsh's nomination to lead the Federal Reserve earned cautious approval in a survey of more than two dozen former Federal Reserve officials and staff. Roughly two-thirds of individuals surveyed said they approved of the choice, citing Warsh’s experience at the Fed during the 2008 financial crisis and his institutional knowledge, while another third either didn’t approve or hadn’t yet formed an opinion.
A former colleague at the Fed called him "thoughtful and measured" during policy discussions while others praised his academic qualifications and communication skills. One person called him “an excellent nominee.”
A number of people expressed concern about Warsh’s past criticism of central bank policies and its people. Some people argued that Warsh was mistaken on key monetary policy issues during his time at the central bank. Most also said they were unsure how Warsh will manage his loyalties to a president who offered him the job and to the institution he is set to lead. The president has demanded much lower interest rates. It is unclear whether Warsh is prepared to defy the President if economic developments don’t support further rate reductions.
The survey of 29 former Fed board governors, regional bank presidents and staff was conducted between Feb. 1 and Feb. 4, after President Trump announced his plans to nominate Warsh to lead the central bank. Nineteen people said they approved of the nomination, five said they didn’t approve, three said they were undecided and one provided no specific response. The group included 10 former regional bank presidents, four former governors and 14 former staff at the Fed board in Washington and regional Fed banks. The survey is conducted in partnership with Duke University’s Economics Department.
A number of people cited Warsh’s resume approvingly: He has degrees from Stanford University and Harvard Law School, worked in the White House, spent five years on the Fed's Board of Governors, arriving in 2006, and helped to navigate the financial system's near collapse in 2008. He was a part of Ben Bernanke’s inner circle of advisors and was tasked by the chairman with creating the Fed’s Division of Financial Stability after the crisis. Beyond that, he was tasked to conduct an independent review of Bank of England policies and holds membership in the Group of 30.
“Warsh is a credible candidate,” one person said. “Let's give him a chance and see what he does.”
“Solid past record as governor,” said another. “Clear understanding of the challenges of monetary policy and its formulation.” Another person said Warsh has "the wherewithal to face up to Trump when a policy position is challenged."
Several people expressed concern about the consistently sharp tone that Warsh took on as a critic of the Fed in the years after he left the central bank in 2011. Warsh has called for “regime change” at the Fed and regularly attacked bond purchase policies that gave the central bank a greater footprint in financial markets after the 2008 financial crisis and again after the Covid-19 crisis in 2020. One person asserted Warsh was frequently wrong during his time at the Fed nearly two decades ago in his warnings about near-term risks of inflation. Several people said Warsh’s tone since leaving the Fed will potentially complicate relationships he'll now need inside the institution to succeed.
“He has to run the place, not throw grenades," one survey participant said. Another said Warsh has "the IQ and EQ to do the job" but will need to mend fences with Fed officials and staff after years of public commentary that one person described as “caustic.” Other former officials described his criticisms of the central bank as having been "scattershot," "pandering," and "lacking a clear alternative vision."
Independence
Several former officials said they weren’t sure whether Warsh will defend the Fed's independence or bend to presidential pressure. In all 11 people expressed concern about the Fed’s independence under new leadership. Several noted that to secure the nomination, Warsh had to court Trump's favor in ways that raise doubts about his commitment to fight inflation, including by expressing a willingness to lower short-term interest rates. "Much will depend on where he decides his primary loyalties lie," one person said, "to the president, or to the institution."
Undecided respondents captured a prevailing mood among the larger group: They said they see potential in Warsh—the analytical skills, the crisis experience, the understanding of markets—but worry about his posture since leaving the Fed. Several said it will take months, perhaps a year or more, to know whether he'll be a Fed chair who can balance independence with the political pressures that come with the job.
Fed-Treasury Accord 2.0
Survey participants also were asked to describe how the new Fed chairman might manage the central bank’s relationship with the U.S. Treasury. Warsh has called for a new “Fed-Treasury Accord,” akin to an agreement created between the two institutions in 1951 that gave the central bank more independence from executive branch interference. That agreement relinquished the Fed of responsibility to hold down long-term government borrowing costs, as it had been doing during and after World War II.
A number of survey participants said it is unclear what a revisited accord might look like in a modern context. Unlike the post-World War II period, the Treasury has not had a say in the Fed’s monetary policy decisions in recent years, including the construction of its securities portfolio and its so-called “quantitative easing” policies, which affect long-term interest rates. Those decisions have been made internally by the Fed. “Why Kevin thinks it would be constructive to revisit this issue is beyond me,” one person said. “I have no idea what alternative approach he has in mind.”
Former officials expressed uncertainty about how a new accord might alter the Fed’s debt holdings or its relationship with the Treasury, and whether a new accord would give the Fed more independence or less. Some people expressed concern that a new accord might do the opposite of the 1951 agreement and increase the Fed’s deference to the Treasury on long-term interest rates, which could be seen as fiscal dominance. "The Fed is clearly vulnerable, if not already dominated by fiscal debt management needs," one person said.
A number of people agreed with Warsh’s assessment that the Fed is overdue to review its long-run balance sheet strategy and develop a plan for its securities holdings after years of balance sheet expansion, something Chairman Jerome Powell did not do. “I expect when Kevin Warsh talks about a new accord, he aims to narrow the central bank’s footprint in markets and clarify roles during times of crisis intervention and normalization,” another person said.
Some people agreed with Warsh that the Fed’s portfolio should be more heavily weighted toward short-term Treasury bills, with fewer holdings of long-term Treasury and mortgage debt. As one respondent noted, that creates a potential point of contention: While Warsh wants to reduce the Fed’s holdings of mortgage debt and long-term Treasury securities, doing so could push up long-term interest rates, which could run counter to Trump administration objectives.
This person said an accord might include clear statements from both institutions about their long-run plans for debt to help avoid market confusion. Such a scenario might include reductions by the Fed in the weighting of its long-term debt holdings, in accord with its goals, offset by Treasury reductions in issuance of long-term debt to avoid market disruption and upward pressure on long-term rates, in accordance with its goals.
“A new Fed Treasury Accord will likely have some substance and a lot of marketing,” another former official said. “It might include guardrails to keep the Fed from working against Treasury objectives regarding the maturity structure of government debt. It might also include a plan for gradually reducing the Fed balance sheet without disrupting Treasury markets. Finally, it could state clearly that the Fed won’t respond to Treasury demands to purchase solely for reducing the cost of increasing the debt.”
