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The Senate Banking Committee voted 13-11 along party lines Wednesday to advance Kevin Warsh\u2019s nomination as the next chair of the Federal Reserve, the first fully partisan committee vote on a Fed chair in the panel\u2019s history, according to Sen. Elizabeth Warren. Hours later, current Fed Chair Jerome Powell will deliver what is very likely to be his last interest-rate decision before his term expires May 15, holding rates steady at around 3.6%.<\/p>\n
To Claudia Sahm, the former Federal Reserve economist known for founding the eponymous recession indicator, the vote is just the start of the idiosyncrasy. \u201cThis is not normal is going to be a theme,\u201d Sahm told Fortune. \u201cFrankly, it could be a theme for Warsh\u2019s tenure as Fed chair.\u201d<\/p>\n
Sahm\u2019s remarks come in a climate of widespread concern about the nature of his appointment after an unprecedented assault on central bank neutrality by President Trump. Most economists and politicians, even some Republicans, lay the blame more squarely on Trump than on Warsh himself. Sen. Thom Tillis (R-N.C.), who had blocked Warsh\u2019s nomination over the recently withdrawn DOJ investigation into Powell, told Warsh at his hearing that he was an \u201coutstanding nominee\u201d \u2014 making clear the holdup was about Trump, not the candidate.<\/p>\n
Sahm, who worked at the Fed during Warsh\u2019s tenure as a governor from 2006 to 2011, but doesn\u2019t know him personally, said his confirmation hearing last week broke with a tradition of deference Fed leaders have historically shown to Congress. She pointed specifically to Warsh\u2019s exchanges with Sens. Elizabeth Warren and Raphael Warnock, in which he made jokes deflecting pointed questions about the 2020 election and President Trump\u2019s grade for the economy.<\/p>\n
\u201cHis jokey replies to Warren and Warnock at the hearing were a disrespect I have never seen a Fed Chair show in testimony,\u201d Sahm said. \u201cI\u2019ve watched a lot of hearings and testimony that Fed chairs have given\u2014ones where they\u2019re getting some very tough lines of questioning. They show a lot of respect.\u201d<\/p>\n
Skanda Amarnath, executive director of Employ America, sees both forces at work. But he argued Warsh had ample opportunity to dispel doubts about his independence and didn\u2019t take it. \u201cHe could have made a name for himself as someone who was going to be able to work with the whole committee,\u201d Amarnath told Fortune, noting that Sens. Chris Van Hollen, Raphael Warnock, and Catherine Cortez Masto had all asked \u201cpretty calm, sober\u201d questions Warsh could have engaged with substantively, rather than \u201csmugly.\u201d\u00a0<\/p>\n
\u201cUltimately, the Fed is a creature of Congress. So it would seem like it was a good time for him to win over some new friends. He chose to not take that path.\u201d<\/p>\n
The takeaway, Amarnath said, is that Warsh enters the role under a partisan cloud that will shape how the Fed is perceived going forward. \u201cAnd if that\u2019s the case, it probably makes things more challenging for the Fed to be effective in a crisis, for the Fed\u2019s legitimacy long term.\u201d<\/p>\n
\u201cRegime change\u201d<\/p>\n
But Sahm\u2019s concerns about Warsh extend beyond the independence question. After re-reading years of Warsh\u2019s speeches and op-eds, Sahm said his actual monetary framework remains opaque even to specialists. \u201cHe always talks at like a 30,000-foot view,\u201d she said. \u201cHe says stuff that sounds smart, but if you know the institution, or you know the details of monetary policy, it\u2019s like word salad. Like he makes my head hurt.\u201d<\/p>\n
During his time as Fed governor, Warsh was known for delivering vivid, literary speeches\u2014particularly during the 2008 financial crisis, when he declared early on that \u201cthe Panic began before the recession and will assuredly end before it,\u201d a deliberate historical reframing that placed the modern crisis alongside the panics of 1837 and beyond, rather than treating it as an ordinary downturn.<\/p>\n
But after leaving the Fed in 2011, Warsh built a second reputation as one of the institution\u2019s loudest external critics. In a March 2016 speech to the National Association for Business Economics titled \u201cChallenging the Groupthink of the Guild,\u201d he argued that the Fed\u2019s reliance on consensus forecasts and economic models had calcified into intellectual conformity. \u201cThe clustering of economic forecasts reveals conformity of views inside the Fed,\u201d he said, noting that FOMC members\u2019 estimates \u201cclosely match the outputs of the staff forecast.\u201d<\/p>\n
\u00a0He also called the Fed\u2019s \u201cmantra of data-dependence\u201d a cause of \u201cerratic policy lurches in response to noisy data,\u201d and compared the central bank\u2019s attachment to its models to centuries of misplaced faith in Ptolemaic astronomy.<\/p>\n
At his confirmation hearing last week, Warsh pledged a \u201cregime change\u201d at the Fed: ending forward guidance, retiring the dot plot, and refusing to commit to continuing Powell\u2019s practice of holding press conferences after every meeting.<\/p>\n
It is precisely the gap between the diagnosis, which he has spent a decade refining, and the vagueness of his actual prescriptions that troubles Sahm. If Warsh doesn\u2019t want to use data, what does he want to use? The deeper problem, she argued, is bad-faith framing of an institution Warsh helped run.\u201dIt\u2019s almost like\u2014I saw you. I know you were in the building. I know that you know better than what you\u2019re saying,\u201d she said.<\/p>\n
She is also skeptical of Warsh\u2019s signature policy idea\u2014that the Fed should cut rates preemptively in anticipation of AI-driven disinflation. \u201cI think it\u2019s completely off the table,\u201d Sahm said.\u00a0<\/p>\n
With inflation at 3.3%\u2014its highest in two years amid an energy shock from the Iran war\u2014and ongoing tariff pass-through still not quite working through goods prices, an early cut would require seven FOMC votes Warsh does not have. He is replacing Stephen Miran, the committee\u2019s most vocal dovish voice, meaning the rate-cut coalition shrinks rather than grows. \u201cHe doesn\u2019t have the chops to make that argument persuasively on day one, and nobody would, because the data aren\u2019t there yet,\u201d Sahm said.\u00a0<\/p>\n
The pressure on Warsh, she warned, will not subside once he takes the chair. Trump has continued to call for interest rates as low as 1%, while a DOJ criminal investigation of Powell\u2014recently dropped to clear Warsh\u2019s path\u2014set a new precedent for executive-branch confrontation with the central bank.<\/p>\n
\u201cThis pressure campaign from the White House on the Fed\u2014I cannot believe it ends with Warsh becoming Fed chair,\u201d Sahm said. \u201cTrump wants to see interest rates lower.\u201d<\/p>\n
Asked how Warsh will communicate to a public still reeling from five years of above-target inflation, Sahm offered two paths. He could follow Powell\u2019s data-driven approach. Or, she said, \u201che could step up to the mic and tell us about how we\u2019ve entered a golden age.\u201d<\/p>\n
#normal #Fed #economist #sounds #alarm #Kevin #Warsh #onesided #confirmation<\/p>\n","protected":false},"excerpt":{"rendered":"
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