Alright, Jerome Powell is leaving the Fed on May 15. In three weeks. And his successor, Kevin Warsh, has just gone through a Senate hearing. He promised independence, but at the same time announced that he wants to change everything about how the Fed operates.
From how it measures inflation, to how it communicates with the markets. And as if that were not enough, a Republican senator is blocking his appointment.
WHO IS KEVIN WARSH?
“And who is this Warsh, Christos?”
Kevin Warsh was a Fed governor from 2006 to 2011. In other words, he experienced the 2008 crisis from the inside. After that, he went to Stanford, to the Hoover Institution, while also managing venture capital investments on behalf of the legendary Stanley Druckenmiller.
But that is not all. Warsh has ties to Silicon Valley that go back decades. From his student years at Stanford, he has known Peter Thiel, Yahoo’s Jerry Yang, and Marc Andreessen. In fact, he has investments in startups ranging from crypto to artificial intelligence.
And to understand how big this is, Warsh and his wife, Jane Lauder, are estimated to have a net worth of around $192 million. Yes, you read that correctly. Powell, who until recently was the wealthiest chairman in Fed history, had a net worth of $19 million to $75 million. Warsh is on a completely different level. In short, he would become the first “tech bro” Fed chair.
WHAT HE SAID IN THE SENATE
Now let’s move to the most important part. What did Warsh say at Tuesday’s hearing?
First of all, he stated clearly: “The independence of monetary policy is essential. The Fed must stay in its lane.” He added that the Fed is at greatest risk when it gets involved in social or fiscal policies, areas where it has no authority.
Trump never asked him to cut interest rates. At least that is what Warsh himself said.
But this is where things get even more interesting. Warsh does not simply want to take Powell’s seat. He wants to change the entire way the Fed operates. He literally spoke about “regime change.”
What does that mean? Two things.
First, he wants to change the way the Fed measures inflation. Right now, it uses core PCE, which shows 3%.
Warsh prefers the so-called trimmed averages. What does that mean? In very simple terms, you remove the extreme numbers, the very high and the very low, and look at what remains. Using that method, inflation appears closer to 2.3%. He even called the current core PCE “a crude estimate.”
Second, he wants to end forward guidance. What does that mean? The Fed would no longer tell markets where it intends to take interest rates. Warsh believes these projections do more harm than good, because markets react to what might happen instead of what is happening now.
Of course, there is one big “but.” Elizabeth Warren accused him of lacking independence. Senator Jack Reed was more sarcastic: “I must congratulate you on the way you circularly avoid answering questions without actually answering them.”
THE TILLIS OBSTACLE
And this is exactly where Senator Thom Tillis enters the picture. A Republican. And he is blocking Warsh.
“Why, Christos? Isn’t he one of theirs?” you might ask.
Here is the story. The Department of Justice, under prosecutor Jeanine Pirro, has opened a criminal investigation into Jerome Powell. Over what? Cost overruns in the renovation of Fed buildings. Tillis, and Powell himself, say the investigation is politically motivated. They argue that Trump is using the justice system to intimidate the next chairman.
And Tillis is not backing down. He is saying: “Close the investigation first, and then I will vote for Warsh.” Pirro, on the other hand, said yesterday that the investigation is continuing and that she will appeal a court decision that blocked subpoenas against Powell.
Let’s also mention this. Republicans have a 12 to 10 majority on the committee. One dissenting vote is enough to block everything. And with Powell’s term ending on May 15, time is running extremely short.