Under political pressure, is the Federal Reserve still independent?

Original Title: Kevin Warsh to Say Fed Independence Not Threatened by Political Pressure
Original Author: Claire Jones and Myles McCormick, Financial Times
Translation: Peggy, BlockBeats

Editor’s Note: During the Senate Banking Committee confirmation hearing, Kevin Warsh for the first time systematically articulated his understanding of the Federal Reserve’s role and independence.

This hearing appears to focus on interest rates and inflation, but essentially addresses a more core issue: in the context of increasing political pressure, how should the boundaries of central bank independence be defined, and can they be maintained?

This discussion occurs amid a set of highly intertwined realities. On one hand, Trump repeatedly publicly pressured the Fed to cut rates and harshly criticized current Chair Jerome Powell; on the other hand, the U.S. Department of Justice’s investigation into the Fed headquarters’ $2.5 billion renovation project is viewed by Powell as an indirect form of pressure. In Congress, Republican Senator Thom Tillis directly linked this investigation to personnel appointments, explicitly stating he would block nominations from proceeding to a full Senate vote until the investigation concludes. Monetary policy, regulatory investigations, and political appointments are layered and amplified at this point.

The macro environment also offers no buffer. Post-pandemic inflation once soared above 7%, and remains significantly above the 2% policy target; combined with the Iran conflict pushing energy prices higher, price pressures may continue to rise in the coming months. With inflation not yet effectively subdued, disagreements over “whether to cut rates” have quickly shifted from technical discussions to political issues.

In this context, Warsh’s statements present a more pragmatic framework: on one hand, he seeks to “cool down” public interventions from the President and Congress, believing that expressing views on interest rates does not constitute a substantive erosion of independence; on the other hand, he points to the real risk facing the Fed itself—if it fails to fulfill its core responsibility of controlling inflation, public trust will be weakened, and independence will lose its foundation.

Thus, the meaning of “central bank independence” is subtly shifting: it is no longer just an abstract principle of institutional design, but more of a result-oriented credibility mechanism. Independence is not innate; under the triple pressures of inflation, politics, and markets, it is continuously tested and reshaped.

Below is the original text:

Kevin Warsh, the next Fed Chair nominee proposed by U.S. President Trump

Trump’s nominee for Fed Chair will tell Congress that the independence of the U.S. interest rate decision-making body “has not been particularly threatened” when political figures call for adjustments to borrowing costs.

Kevin Warsh will state during his opening remarks to the powerful Senate Banking Committee on Tuesday: “When elected officials—whether the President, Senators, or House Members—express their views on interest rates, I do not believe that the operational independence of monetary policy is under particular threat.”

According to a prepared speech seen by the Financial Times, he will tell senators, “Federal Reserve officials must be sufficiently firm to listen to diverse viewpoints from all sides,” while also being “humble enough to remain open to new ideas and economic developments.”

This statement comes at a time when Trump has repeatedly called for the Fed to cut rates. The U.S. President has called current Fed Chair Jerome Powell a “fool” and an “idiot,” accusing him of failing to obey directives.

Powell has said that the Department of Justice’s investigation into a $2.5 billion renovation of the Fed headquarters is an excuse to pressure the rate-setting body to lower borrowing costs.

Thom Tillis, a Republican senator from North Carolina and a member of the Senate Banking Committee responsible for reviewing the Fed Chair’s nomination, said he would block Warsh’s nomination from proceeding to a full Senate vote until the investigation into Powell concludes.

Warsh is expected to potentially succeed Powell as early as May 16. He will explicitly state that the Fed’s independence in setting interest rates is “crucial” and key to controlling inflation.

However, this former Fed governor will also call on the Fed to “stay true to its core functions,” arguing that when the central bank “enters into fiscal and social policy areas for which it has neither authorization nor expertise,” it weakens its own independence.

He said, “The Fed should not become a万能机构 of the U.S. government, nor should it serve as an appellate court for issues that should be discussed and decided elsewhere.” The 56-year-old candidate will also elaborate on his reasons for being suitable for the position, telling legislators that he will bring “both insider experience and outsider skepticism,” referencing his education at Stanford, Wall Street experience, and previous tenure as a Fed governor.

Warsh also pointed out that “independence” reaches its highest level when executing monetary policy, but this level of independence does not apply to other functions the Fed performs under congressional authorization. He told the committee, “In managing public funds… or in banking supervision and prudential policies… as well as in international finance, Fed officials should not enjoy the same special respect.”

The Fed plays an important role in banking regulation, but in setting regulatory rules and overseeing financial system risks, it has already collaborated with the U.S. Treasury and other regulators.

Warsh also told senators that when the Fed fails to fulfill its inflation control responsibilities, it effectively weakens its own independence. He believes this will cause the public to “lose confidence in our economic governance system, and doubt whether the so-called monetary policy independence is really as important as people say.”

After COVID-19, inflation once soared to multi-decade highs, exceeding 7% in 2022. Currently, inflation remains above the Fed’s 2% target, and with energy prices driven higher by the Iran conflict, price pressures are expected to further increase in the coming months.

Warsh stated, “Congress has tasked the Fed with ensuring price stability—no excuses, no ambiguity, and no debate or evasion.” He also emphasized, “Inflation is a choice, and the Fed must be responsible for it.”

[Original link]

Click to learn more about Rhythm BlockBeats job openings

Join the official Rhythm BlockBeats community:

Telegram Subscription Group: https://t.me/theblockbeats

Telegram Discussion Group: https://t.me/BlockBeats_App

Twitter Official Account: https://twitter.com/BlockBeatsAsia