Warsh pushes his ‘regime change’ plan at Senate hearing: analysis

Kevin Wersh faced questions at his Senate confirmation hearing on Tuesday. Democrats and even Republicans at times challenged his complicated finances, his ties to President Donald Trump and what often seems like broad support of the promise of artificial intelligence. But one key issue remained completely uncontroversial for Wersh: his plan for what he calls “regime change” at the Federal Reserve.

Warsh has planned for years to drastically change the way the Fed operates, right down to the definition of the word “inflation.” The plan remained largely intact through the hearings, putting Wersh in a strong position if confirmed quickly to attempt an overhaul of the Fed. Any attempt at major changes will certainly provoke discontent and disagreement within the Fed, as well as their efforts to quickly lower interest rates. But Warsh said Tuesday he welcomes a “good family fight” and that the objections from other Fed policymakers may only be an advantage in Warsh’s eyes as he seeks to overturn the way they do business.

Warsh has faced attacks on his credibility since he was nominated by Trump in January. The President has publicly called for interest rates to be lowered below 1%. He attempted to fire a Fed governor and encouraged his Justice Department to move forward with an investigation into current Fed Chairman Jerome Powell. The courts are giving decisions on those issues.

Varsh tried to allay concerns about Trump. Asked repeatedly about what he might have said to Trump, he told senators, “The President never directed or suggested to me generally or specifically that I should commit to any interest rate path.”

But several difficult exchanges followed.

Sen. Jack Reed, D.-R.I., told Warsh, “I have to commend you for the way you can sidestep questions and not answer them.” “It’s a skill. Unfortunately, it’s not a good skill to have for the chairman of the Federal Reserve Board.”

Some prominent former Fed officials have also expressed skepticism. Former Chairwoman Janet Yellen recently said she believed Warsh would have difficulty influencing the Federal Open Market Committee, where she would need a majority of 11 other votes to change rates. “I really don’t see that the FOMC will accept this in the short term,” Yellen said.

Probably not, and while Wersch can’t completely ignore other Fed officials, he has spent his time defining himself in opposition to them since leaving his previous tenure at the Fed in 2011.

“A quote from Milton Friedman always stuck with me,” Warsh said during the hearing. Warsh once worked as a research assistant for Friedman, an influential conservative economist. He said, “He was always concerned about government officials who lured him and what he called the tyranny of the status quo. Status quo practices and policies are especially harmful when the world is changing so rapidly.”

Varash will break that status quo. He declined to commit to continuing the regular press conferences at the hearing, which the Fed has held since the financial crisis. That would skip forward guidance, the Fed’s way of signaling to markets where it wants interest rates to go. He would even move away from the Fed’s favorite measure of inflation, the core personal consumption expenditure measure, which he dismissed as “a blatant mess of what was going on” with prices. “We don’t have to do anything drastic anymore.”

These ideas aren’t just window dressing for Warsh. They thus bring down the long-term interest rates that plague Americans in the form of high mortgage and credit-card rates. Warsh believes markets have pushed those rates higher in response to the Fed’s disorganized policy, including the recent post-Covid inflation spike — but also going further back. He argues that the Fed has lost credibility.

Warsh left the Fed in 2011 because, he said at the time, he objected to programs that embedded the central bank too deeply in the American economy. A big part of this was the Fed’s asset-purchase program, called quantitative easing, which has left $6.7 trillion in financial assets on the Fed’s balance sheet. Warsh said at the time that the program was vital to addressing the financial crisis, but that it should have been ended long ago.

Warsh said in a September 2009 speech, “Winning the war against the terror of 2008 was a necessary but insufficient condition for winning peace and ensuring a strong foundation for economic prosperity.” Warsh argued that the Fed needs to step back from its micromanagement of the economy. They argue that the Fed has neglected “market discipline” or allowed ailing companies to fail. The result is an economy that is running much weaker than expected, with officials who are likely to pounce on any sign of trouble.

In 2023, after the Silicon Valley banks and other institutions failed and were bailed out by the Fed and other government institutions, Wersh attributed this episode to the Fed’s screwing of the economy. He said in an interview that year, “A decade-long period of free money, negative real interest rates, and massive asset purchases by the world’s central banks from their own treasury portfolios is causing deep complacency in the financial markets, among regulators and (market participants).”

Warsh’s diagnosis of the Fed’s problems is not that its interest rates are wrong. Rather, he believes that the institution’s entire way of looking at the world since the financial crisis is wrong. In their minds, interest rates aren’t decided by a quarter point higher or lower. Rather, it is determined by the Fed coming in and showing the markets and the public that there is a new sheriff in town.

It’s too early to say whether Warsh can quickly make the case for the rate cuts Trump has demanded, although he has the advantage of time. The longer his nomination drags on, the more likely the Fed and other central banks will be able to look past the oil-price shock of the Iran war and worry about the weak labor market. He will argue for cuts.

Regardless, if Warsh is brought to the Fed amid discontent over the central bank, he may only help make his case to the public that this is an institution that has lost its way. The Senate, at least, showed little sign that it disagreed.