Potential Powell Successor Warsh Urges Fed Rate Cuts, Balance Sheet Slashing, Regime Change

(MaceNews) – Former Federal Reserve Governor Kevin Warsh, one of the leading candidates to succeed Fed Chair Jerome Powell, urged both interest rate cuts and balance shrinkage as he virtually campaigned for Powell’s job in a television interview Thursday night.

Warsh, who was a member of the Fed board of governors from 2006 to 2011, during the height of the Great Financial Crisis, told Fox News the Fed should cut rates immediately, but he didn’t stop there.

The 55-year-old former investment banker, one of several potential nominees to replace Powell when his term expires next May, said the Fed also needs to slash its $7 trillion balance sheet and launch a total “regime change” that would encompass every aspect of the central bank’s activities.

Nor was Warsh shy about expressing his opinions on fiscal policy, saying that the Fed chairman and the Treasury secretary need to coordinate with each other on a strategy for bringing down long-term interest rates, not just short-term ones.

He alleged that the Powell Fed has failed to bring down longer term rates and thereby help home buyers because of a series of policy “mistakes” that have undermined its credibility.

The Fed’s rate-setting Federal Open Market Committee is scheduled to meet next Tuesday and Wednesday, and is widely expected to hold the key federal funds rate in a target range of 4.25% to 4.5% for a fifth straight meeting after lowering the policy rate by 100 basis points over the last three meetings of 2024.

Asked by Fox’s Brett Baer if he would cut rates if he were Fed chair at the next meeting, Warsh didn’t hesitate to assert, “I’d be voting for a rate cut.”

“That’s not news,” he continued. “That’s been my view for quite some time.”

Warsh said, “part of the reason (market) interest rates are as high as they are, why first time home buyers are struggling to get a new mortgage, is the Fed is fighting the last war. They have lost credibility, because they let inflation get out of control in 21-22 and beyond, and now they’re keeping interest rates higher than they need.”

But Warsh said that, for him, rate cuts would only be “the place to begin; they’re not the place to end.”

“Rate cuts are a first step to what I have said for a decade is regime change that is necessary at the Federal Reserve,” he elaborated. “That means regime change in how we’re thinking about inflation, how we’re conducting policy, how we’re communicating. It’s also regime change in terms of how we’re regulating and supervising banks.”

“To give you one little example, the Fed right now is carrying almost a $7 trillion balance sheet…,” Warsh went on, “That’s like emergency liquidity for Wall Street. Well, no surprise, Wall Street is doing great. Main Street is not doing as well.”

His answer: slash the Fed’s balance sheet, although he didn’t say by how much.

“What we can do is shrink the size of the balance sheet in coordination with the Treasury and cut interest rates on Main Street,” he said. “We’ll have a stronger economy as part of a comprehensive reform package at the Fed.”

President Trump, who earlier Thursday visited the Fed’s Washington, D.C. headquarters amid allegations that the Fed is overspending on an ambitious renovation, has been accused of threatening the Fed’s independence with his strident interest rate cut demands and even insults.

But Warsh emphasized that the Fed is “not independent of government. Its monetary policy is independent inside of government.”

“I think I would put it simply,” he continued. “When the president was there to see the building today I don’t know if they showed it to him, but the Fed has a printing press, and that printing press can provide all the money in the world. They can run it hot or can run it cold, and that’s the instrument the Fed uses to try to provide lower or higher interest rates, easier or tighter money for Wall Street. “

But Warsh said, “the more important thing” is the Fed’s credibility or lack thereof.

“The leaders of the Fed have to be credible, so that when they cut rates long-term interest rates fall,” he emphasized, noting that when the Fed cut the funds rate by 50 basis points last September, then proceeded to cut the policy rate twice more, “long-term rates went up.”

“That’s a Bronx cheer,” said Warsh, referring to New York slang for a show of disapproval. “That’s markets and the business community saying you made a mistake.”

“You need a credible new set of leaders and new policies, so when we cut rates as a first step, interest rates fall, 30-year fixed interest rates fall with it,” he added.

Asked whether the Fed can cut rates without refueling inflation, Warsh replied, “If and only if you have a credible central bank that’s not making a series of mistakes.”

“This central bank made mistakes in 2018, when they raised rates into a market that fell; 2020, when they came out with a new regime that brought inflation, and the great mistake leading to the great inflation, and they’re making another mistake now,” he added.

“So, I think the short answer is credible central banks can lower interest rates, shrink the balance sheet pull back from being on the front page news every day and deliver a stronger economy,” Warsh said.

Warsh went on to back Trump’s claim that the United States could be in “a golden age” for the U.S. economy.

“I think he’s right,” he said. “I think what’s happening with what we call AI, what other people just call a technology jump it’s a huge productivity increase. The U.S. can lead the world in a five or 10-year period. Our companies are more nimble, our companies will be more profitable, and workers can get paid more.”

“But not if the administration has bad economic policies coming from the Federal Reserve,” he added.

Baer also asked Warsh how the economy can prosper in the face of a $36.7 trillion national debt that is being expanded by more than $1 trillion each year through deficit spending.

“The president inherited fiscal and monetary mess,” Warsh responded. “He’s only been in office for six months. He’s made a lot of down payments toward getting that in the right direction. That’s why economic growth I think is poised to grow. Economic growth can do a lot.”

“Every percentage point of economic growth that we grow above what the consensus estimate is is $5 trillion in revenue over the next 10 years,” he continued. “That helps pay down the debt.”

Warsh added that reducing the debt is “not just (a matter of) economic growth. We have to show markets that we’re serious about cutting expenses. So people might say, ‘oh, how important is a $2 1/2 billion building at the Federal Reserve,’ but if we can show that we’re putting our own house in order, then the financial markets will give us time to grow through and cut this debt over time without a crisis.”

“And that’s what the Treasury secretary and the Fed chairman have to do together,” he added.

Asked whether the Fed should continue to have a “dual mandate” to pursue both maximum employment and price stability or just focus on controlling inflation, Warsh demurred. “So, there’s a bunch of parliaments around the world. They all have different mandates, yet many of them have made the same mistakes.”

“We don’t need new legislation, we just need changes in leadership,” he declared.

Asked what he means by “regime change” at the Fed, Warsh said he wants “regime change in everything the Fed does. So, when we get hit by new facts the new leaders have the credibility and don’t have to fight the last war. They can take on the challenges in front of us, which is probably a productivity boom that’s going to lead the U.S. to win the 21st century.”

Asked whether he want the job of Fed chair, Warsh gave a customary Washington political reply; “Well, that’s up to the president.”

But Warsh left little doubt he’d like the nomination to replace Powell whenever he ceases to be chair. “I’m prepared for public service. I did 11 years of hard time about 11 or 12 years ago, and if the president calls I’d be honored to serve.

Reminded that he last served as Fed governor during the 2008 crisis, Warsh said, “that’s why I needed a break from all this. I’ve been lucky to be in the private sector the last 11-12 years. I grew up in a town a couple of hundred miles from al the bright lights in the big city. This would be my way to do public service, but again that’s not my decision to make. It’s up to the president.

Trump, asked Thursday if he had a Fed nominee in mind, replied, "I do. Two, maybe three."