New Federal Reserve Chairman Kevin Wersh promised to maintain the Fed’s independence when he was sworn in at the White House on Friday.
This is an unusual move, as Fed chairmen are not typically sworn in at the White House, and the President does not typically attend, given that the Fed is supposed to be politically independent.
At Warsh’s confirmation hearing, US President Donald Trump insisted that the incoming central bank chief would be “completely independent”.
But some, particularly Democrats, have questioned how independent Warsh will be as head of the world’s most powerful central bank.
They include Democratic Senator Elizabeth Warren, who described Wersch as Trump’s “sock puppet” during her Senate confirmation hearing in April. Emphasizing that freedom requires courage, Warren asked Warsh: “Let’s examine your freedom and your courage. We’ll start easy. Mr. Warsh, did Donald Trump lose the 2020 election?”
Warsh declined to answer directly, saying instead: “If I’m confirmed, we try to keep politics out of the Federal Reserve.”
“His confirmation hearing did not ease concerns,” Claudia Sahm, chief economist at New Century Advisors and a former Federal Reserve economist, told DW.
This skepticism was reflected in Wersh’s confirmation vote – where only 54 senators voted in favor of him, while 45 voted against – “the narrowest margin of any Fed chair,” Sahm said.
a high-risk appointment
The Fed chairman is one of the most powerful people in the US, overseeing the central bank’s decisions on interest rates, which not only affect the banking sector and the dollar’s exchange rate, but also whether goods and services will become more or less expensive in the world’s largest economy.
People serving in that role are therefore expected to ensure price stability, maintain confidence in the financial system, and protect the stability of the global economy.
But Trump has made no secret about what he expects from Warsh, saying he would be “disappointed” if Warsh did not cut interest rates immediately.
The President appears to be eyeing the midterm elections in November, hoping that lower rates will boost the US economy ahead of key elections.
Warsh has publicly stated that Trump did not pressure him on interest rates.
“The President never asked me to commit to any particular interest rate decision, period,” Warsh said during his confirmation hearing. “Nor would I have ever agreed to do it if he did,” the 56-year-old insisted.
Trump is weakening the independence of the central bank
Warsh’s predecessor, Jerome Powell, already knows what pressure from Trump will be like.
The US president has repeatedly insulted Powell for not lowering rates, and he was even targeted in a Justice Department investigation.
The Fed is supposed to be politically independent, but any change to that would have massive consequences, said Kenneth Rogoff, an economist and Harvard University professor.
“The independence of the US Federal Reserve is uniquely important in the global financial system. Because the dollar is at the top of the global financial system. And when the US becomes unstable it affects everyone,” he told DW.
Trump’s trade policies and Iran have already eroded international confidence in the U.S. president, but “when I talk to investors and ask them what they really care about, they say: central bank independence,” Rogoff pointed out.
money and connections
Warsh, who was born in Albany, the capital of New York state, studied political science with a focus on economics and statistics at Stanford University. He then attended the prestigious Harvard Law School and earned a law degree in 1995.
After this, Warsh worked in investment banking at Morgan Stanley. In 2002, then US President George W. Bush appointed him as his economic advisor. That same year, Warsh married Jane Lauder, heiress to the Estée Lauder cosmetics empire.
In 2006, Warsh, then only 35, was appointed to the Federal Reserve Board of Governors, becoming its youngest-ever member. There, he earned a reputation as a monetary policy “hawk” for publicly criticizing the policies of then-Fed Chairman Ben Bernanke.
In response to the global financial crisis of 2007–8, Bernanke adopted an extremely loose monetary policy, cutting benchmark interest rates as low as possible while initiating massive purchases of government bonds.
After disagreements with Bernanke, Warsh left the Fed in 2011 and subsequently worked in the investment banking sector and universities.
Warsh has a substantial fortune, estimated at around $200 million (€173 million), according to the Office of Government Ethics, a government agency that investigates conflicts of interest involving government employees.
This also includes the fate of his wife, who forbes The magazine estimates it to be around $2 billion.
Will Varsh stand before Trump?
The new head of the Fed brings with him experience within the central bank as well as an understanding of how Wall Street works and what it wants. Therefore, they should be clear that they should avoid creating any impression that the course of the central bank is being decided by Trump.
If this sentiment takes hold, the market will react, Rogoff warned.
“If you try to get rid of the independence of the central bank, the markets say, what are you planning to do? Are you trying to influence us? And they immediately raise interest rates – which, of course, is the opposite of what the government wants.”
Meanwhile, Sahm’s view is that, “Up to this point, Wersh has had to impress the President to get the job.”
But now, he must reassure financial markets and the rest of the Federal Open Market Committee that he will lead the central bank well, he said. “It’s unlikely he’ll keep everyone happy for long.”
What will happen to interest rates?
According to media reports, Wersh recently spoke out in favor of low interest rates – this position is completely in line with Trump’s views.
However, this is puzzling, as the economic environment appears to be the opposite, with inflation rising due to the war in Iran and high energy prices.
If the Fed lowers interest rates now, it will not only boost the economy but also increase inflation. Several members of the Fed’s 12-member rate-setting committee have already spoken out against interest rate cuts.
So, even if Wersch really wants to cut rates in accordance with Trump’s agenda, he will have to convince committee members to vote in favor of the cut.
Moreover, outgoing Chairman Powell – who attracted Trump’s ire – has taken an unusual step by deciding to remain at the Fed. In his final press conference as president of the central bank, he announced that he would remain on the Board of Governors – a move that would give him an unusually influential voice on the body.
Powell’s case also shows how much things can change. Trump, who today calls him “incompetent,” “stupid,” or even “corrupt,” was the one who nominated him for Fed chairmanship in 2017.
This article was originally written in German