Fed chair nominee plans 'fundamental' changes

Kevin Warsh, nominee for chair of the Federal Reserve, signaled that there would be "fundamental" changes to be made if he's confirmed to take the position, including a smaller central bank balance sheet and a different way of approaching inflation.

Warsh is a financier and former member of the Fed's board of governors. He was nominated in January by US President Donald Trump to replace Jerome Powell, the current Fed chair.

Trump has repeatedly called for lower interest rates and criticized current Fed Chair Powell ever since the beginning of his second term.

Just hours before Warsh's two-hour hearing conducted by the Senate Banking Committee, Trump said in an interview with CNBC he would be disappointed if his choice for Fed chair did not immediately cut interest rates.

Warsh said on Tuesday during the hearing that he would not lower interest rates solely because the president demanded it.

"I will be an independent actor if confirmed as chair of the Federal Reserve," Warsh told the committee.

He said Trump's desire for much lower interest rates "sounded very similar to me, to every other president in economic history that I've studied", adding that leaders generally have a strong preference for lower rates.

Warsh said the Fed should rely primarily on interest rates rather than its $6.7 trillion balance sheet to achieve its policy goals.

"At least as important, it should not be holding long-term Treasury assets as if it's the fiscal authority," he said, referring to $3.6 trillion worth of US notes and bonds — debt that matures in over a year.

Warsh emphasized that the change would be slow to give markets time to adjust to a reduced Fed demand for Treasuries.

"That kind of regime change would have to be deliberate, well-orchestrated, well-choreographed and well-described, so that unnecessary upsets are not done to financial markets as we go to a policy regime change much more focused on interest rates," he said.

He said that an interest rate tool is fairer and hits the entire economy, while the balance sheet tool "disproportionally helps those with financial assets".

Warsh said the high inflation rates in recent years were due to problems from a "fatal policy error going back four, five years" and "a legacy that we are still dealing with".

"We need fundamental policy reform to fix it," he said. "That means a regime change in the conduct of policy. That means a different new inflation framework."

ING economist James Knightley said analysts were watching to see how closely Warsh aligned with the president on rate cuts.

During Warsh's 2006-11 tenure as Fed governor, he was considered more "hawkish" — favoring controlling inflation by keeping interest rates higher.

He appears to have shifted his stance, advocating for tech investments and AI, which some believe can change the US economy's ability to grow without generating the same degree of inflationary pressures, Knightley said.

For now, however, higher gasoline prices due to the war in the Middle East prove an immediate challenge to rate cuts.

Agencies contributed to this story.