Vosh: Interest rate decisions will be strictly independent; controlling inflation cannot be postponed

Author: Xiao Yanyan, Jintou Data

The U.S. Senate Banking Committee will hold a confirmation hearing for Federal Reserve Chair nominee Kevin Warsh on Tuesday at 10:00 a.m. Eastern Time (10:00 p.m. Beijing Time on Tuesday).

Warsh will tell lawmakers at the hearing that the Fed’s independence in setting interest rates is crucial, but this independence must always be earned through one’s own efforts.

According to a prepared opening statement obtained by POLITICO, Warsh stated that monetary policymakers must make decisions based on “rigorous analysis, meaningful deliberation, and clear decision-making.” But he also implied that President Trump’s firm calls for lower interest rates do not pose a threat to the Fed’s independence.

“When elected officials—presidents, senators, or representatives—express opinions on interest rates, I do not believe that the operational independence of monetary policy is under particular threat,” Warsh will say. “Central bank officials must have enough mental resilience to listen to different viewpoints from all sides.”

Whether the Fed’s independence from short-term political pressures can last will be a core theme of Warsh’s hearing on Tuesday. Trump has been pushing for rate cuts continuously, even threatening to fire current Chair Jerome Powell because he has not cut rates more aggressively.

To subtly counter the outside view that he would cut rates under any circumstances, Warsh will also emphasize his determination to control inflation, stating that price stability is the Fed’s mission—“not to be shirked, not to be vague, not to be debated, not to be troubled.”

According to his prepared statement, “Inflation is a choice, and the Fed must be responsible for it.” “Low inflation is the Fed’s armor, an important protection against attacks. So when inflation surges—as it has in recent years—our citizens suffer serious harm, especially the poorest among us.”

Warsh said he shares Trump’s confidence in the economy. “(Trump) believes that U.S. economic growth and real after-tax income will accelerate. The potential for U.S. economic growth is rising,” Warsh said.

In his statement, Warsh indicated that the respect the Fed commands in monetary policy does not extend to other areas, such as banking regulation, international finance, and “public funds management.” Warsh said he agrees with the White House’s view that the Fed has overstepped its congressional mandate.

He also advocates that the Fed needs to “stay in its lane” and avoid involving itself in fiscal and social policies outside its statutory authority.

“When the Fed involves itself in fiscal and social policies beyond its powers and expertise, the independence of the Fed faces the greatest risk,” he said. “The Fed should not act as some kind of ‘all-powerful agency’ of the U.S. government, nor should it serve as an appellate court for matters that should be properly debated and decided elsewhere.”

“Undoubtedly, sometimes a Fed chair may wish to have the final say, but our republic does not operate that way,” he added.

“In short, I believe that the independence of monetary policy is something to be earned, and better policy decisions can be made by avoiding interference,” Warsh said.

“I am committed to ensuring that the implementation of monetary policy remains strictly independent.” “I am also committed to working with the government and Congress on non-monetary matters within the Fed’s responsibilities. And I pledge to be accountable for all functions of the Fed.”

Warsh’s testimony was released after being obtained in advance by several news organizations.

Forex analyst Adam Button said that since his nomination, Warsh has been unusually low-profile, which means Tuesday will be the first real opportunity for the outside world to understand his stance. The market is already familiar with Warsh before his nomination; his background sounds hawkish. His dovish tilt is that he believes productivity is about to surge, so rates should be lowered. This aligns with Trump’s wishes. Senators will notice this, and he will face questioning. POLITICO’s report indicates that Warsh will at least go through the motions. Button said:

“I don’t know if anyone will believe what he’s about to say, but once Trump abandons the investigation into Powell, his confirmation is basically a done deal. Tuesday is the hearing, not the vote. What worries me is that his testimony was leaked to Politico, which is already bad behavior for a position that requires strict information control. The only thing that really matters for the currency markets and interest rates is one question: independence. Will Warsh defend it, avoid it, or toe the line? How tough will he be? Can he convincingly avoid saying anything that would cause Trump to withdraw his nomination? Considering all the drama around Iran, this hearing might not be as attention-grabbing as usual.”