U.S. Fed nominee pledges inflation fight even as Trump renews demands for rate cuts that could worsen it

Kevin Warsh speaks to the media about his report on transparency at the Bank of England, in London, Dec., 11, 2014. (AP Photo/Alastair Grant, Pool, File)

WASHINGTON — Donald Trump’s nominee to lead the U.S. Federal Reserve pledged to fight inflation at a hearing Tuesday even as the president renewed his demands for interest rate cuts that could worsen it.

The comments underscore the challenges faced by Kevin Warsh, a former top Fed official whom Trump named in January to replace the current Fed chair, Jerome Powell. Trump has repeatedly attacked Powell for not cutting rates. Investors will be watching the hearing closely to see how Warsh balances Trump’s demands for lower interest rates as the war in Iran pushes up the price of gasoline, adding to inflationary pressures that already exist.

Higher inflation typically leads the Fed to raise rates, or at least keep them unchanged, rather than cut them. When the Fed changes its key rate, it can affect mortgages, auto loans, and business borrowing.

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Warsh told the U.S. Senate Banking Committee that one of this top goals would be to fight inflation, which remains elevated at 3.3 per cent annually.

“Congress tasked the Fed with the mission to ensure price stability, without excuse or equivocation, argument or anguish,” Warsh said. “Inflation is a choice, and the Fed must take responsibility for it.”

Trump was asked Tuesday in an interview on CNBC if he would be disappointed if Warsh didn’t cut rates “right away” if confirmed.

“I would,” Trump said.

Warsh would be in a tough spot if confirmed. Inflation is worsening as the Iran war has sent gas prices higher, making it much harder for the Fed to implement the interest rate cuts Trump so desperately seeks. The conflict could also slow the economy as well as hiring. And if Warsh ultimately becomes chair, he may very well find his predecessor, Jerome Powell, still sitting on the Fed’s governing board, an uncomfortable arrangement that hasn’t occurred since the late 1940s.

Warsh, a former top official at the Fed and a wealthy investor, faced a range of tough questions at the hearing. Democrats have raised the issue of what they see as a lack of transparency regarding some of his vast financial holdings, which total more than US$100 million, according to a recent disclosure.

Warsh expressed support for the Federal Reserve’s independence in his opening statement.

He said such political independence is “essential,” but he also said it wasn’t threatened when “elected officials — presidents, senators, or members of the House — state their views on interest rates." Trump has repeatedly urged Powell to cut the Fed’s key rate from its current level of about 3.6 per cent.

Sen. Elizabeth Warren, a Massachusetts Democrat, said that Trump has not just stated opinions on rates, but has sought to fire a Fed governor and is investigating Powell for recent testimony about the Fed.

She also accused Warsh of flip-flopping on interest rates, supporting higher borrowing costs as a member of the Fed’s board of governors, despite the weak recovery from the 2008-09 Great Recession, and when Democrats were in the White House. She said he switched positions after Trump was re-elected.

“The Senate should not be aiding and abetting Donald Trump’s illegal takeover of the Fed by installing his chosen sock puppet as chair,” she said.

While the long-delayed hearing is a necessary step for Warsh, it’s not clear when the committee may even be able to vote on his nomination. The Justice Department is investigating Powell and the Fed over a building renovation, and Sen. Thom Tillis, a North Carolina Republican, has said he would effectively block Warsh until the probe is dropped.

“Clearly there’s a majority of the committee that’s not going to move this nomination forward, especially while this sham of a criminal investigation is going on,” Sen. Tina Smith, a Democrat from Minnesota, told reporters on a conference call Monday. “It feels a bit like we’re going through the motions when we really have not addressed the fundamental challenges that this nomination has.”

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The turmoil could make a potential transition from Powell to Warsh an unusually turbulent one for the world’s most important central bank, which has typically seen smooth transfers of power. Should the change in leadership prove particularly bumpy, it could unnerve markets and lift longer-term interest rates.

Powell’s term as chair ends May 15. He said last month that he would remain as chair until a successor is named. Powell also is serving a separate term as a member of the Fed’s governing board that lasts until January 2028. Fed chairs typically leave the board when their terms as chair end, but Powell also said last month he would remain on the board, even if a new chair is approved, until the investigation is dropped.

When asked about Powell’s comments, Trump said he would fire Powell if he tried to stay at the Fed. Yet Trump’s previous attempt to remove a Fed governor, Lisa Cook, has been tied up in courts. During oral arguments in January, a majority of justices on the Supreme Court appeared to lean toward letting Cook keep her job.

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Christopher Rugaber, The Associated Press