Under political pressure, is the Federal Reserve still independent?

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

Author: Rhythm BlockBeats

Source:

Reprint: Mars Finance

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

The hearing appeared to focus on interest rates and inflation but essentially addressed 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 within a set of highly intertwined realities. On one hand, Trump has repeatedly publicly pressured the Fed to cut rates and criticized current Chair Jerome Powell with harsh language; 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 the 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%, still significantly above the 2% policy target; combined with Iran conflicts 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 interference 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 but is continuously tested and reshaped under the triple pressures of inflation, politics, and markets.

Below is the original text:

The Fed nominee for Chairman, nominated by Trump, will tell Congress that when political figures call for the central bank to adjust borrowing costs, the independence of the U.S. interest rate decision-making body “has not been particularly threatened.”

Kevin Warsh will state in 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 the operational independence of monetary policy is under particular threat.”

According to a prepared speech seen by the Financial Times, he will tell senators, “Central bank 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 amid multiple calls from Trump 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 stated 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 nomination, said he would block Warsh’s nomination from proceeding to a full Senate vote until the investigation into Powell concludes.

Warsh could potentially succeed Powell as early as May 16. He will explicitly state that the Fed’s independence in setting interest rates “is vital” 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 “engages in fiscal and social policies beyond its authorized and professional capacity,” it actually weakens its 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 qualifications for the position, telling legislators that he will bring “both insider experience and outsider skepticism,” referencing his education at Stanford, his Wall Street career, and his previous experience 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… and in areas involving 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 regulatory agencies.

Warsh also told senators that when the Fed fails to fulfill its inflation control responsibilities, it is effectively weakening 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 truly 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.”