Unorthodox leadership change at the Fed: Warsh on deck while Powell remains

WASHINGTON (AP) — President Trump's pick to lead the Federal Reserve, Kevin Warsh, has said he wants to bring “regime change" to the central bank, but if confirmed by the Senate he will find a Fed already transformed by the White House's attacks.

For the first time in almost five decades, there will be a former chair on the central bank's board, potentially creating an alternate center of power. And on Wednesday multiple officials dissented from the Fed's statement, a sign they won't easily roll over for a new chair who has sharply criticized recent policy. Outgoing chair Jerome Powell — who announced he will remain on the board of governors for a “period of time, to be determined” — has also shown a new outspokenness since the White House launched an unprecedented legal investigation into a Fed building renovation.

Warsh “is inheriting an institution that will fight for independent, consensus-driven decision-making, a potential obstacle to his vision of wholesale ‘regime change,’” said Jon Hilsenrath, a senior advisor to StoneX and visiting scholar at Duke University.

It's all a sharp contrast to the previous three Fed chairs — Ben Bernanke, Janet Yellen, and Powell — who were all Fed governors before becoming chairs in relatively smooth transitions.

At a news conference Wednesday, Powell indirectly acknowledged the unusual nature of his decision, when asked how it would work to have a current and former chair on the board: “I don’t know what the exact specifics of it will be," he said.

He also said he would move to the background as a governor, yet his presence could make it a bit harder for Warsh to cut the Fed's short-term rate, as Trump has loudly demanded. While Powell is considered by economists to generally favor lowering rates, he said inflation is “misbehaving” and signaled it could be months before a cut is considered.

“We no longer anticipate a rate cut in December,” said Gregory Daco, chief economist at EY-Parthenon, but expect the Fed to stay "on hold through the remainder of the year.”

On Wednesday, Powell emphasized that he is staying at the Fed to protect its political independence from the White House's legal attacks, rather than to push for any particular interest-rate policies.

“These legal actions by the administration are unprecedented in our 113-year history,” Powell said. “I worry that these attacks are battering the institution and putting at risk the thing that really matters to the public, which is the ability to conduct monetary policy without taking into consideration political factors.”

Trump has sought to fire Fed governor Lisa Cook over allegations of mortgage fraud, which she has denied, in what has become a test case regarding how much power the White House has to remove Fed governors. Should Trump succeed in firing Cook, he would be able to fill her seat and have much more sway over the central bank's interest rate decisions.

Three of the seven governors are already Trump appointees. So far, courts have allowed Cook to remain in her position and the Supreme Court in January appeared to lean in her favor.

By staying on as governor, Powell will also deny Trump an opportunity to appoint a new governor. The president won't have another shot at filling a seat on the Fed's board until Powell leaves. While his term as chair ends May 15, he can serve as a governor until January 2028.

On Thursday, Trump said he didn’t care if Powell remained at the Fed: “If he stays on, he stays on,” the president told reporters. “I just wanted to make sure that Kevin became the head.”

Treasury Secretary Scott Bessent on Wednesday criticized Powell's decision on Fox Business, calling it “highly unusual” and “a violation of all Federal Reserve norms.”

Powell, however, rejected the notion that his decision has injected politics into the Fed.

“I’m literally staying because of the actions that have been taken,” he said Wednesday. “I had long planned to be retiring and the things that have happened really in the last three months have left me no choice but to stay.”

Still, Powell said he planned to keep a “low profile” in his remaining time on the board, and would not be a “shadow chair.”

“That's just something I would never do,” he said. "There is only ever one chair of the Federal Reserve board. When Kevin Warsh is confirmed and sworn in, he will be that chair.”

The Senate is likely to confirm Warsh on a narrow, party-line vote the week of May 11. In a sign of the increasing politicization of the Fed, when Powell was confirmed for a second four-year term in 2022, the Senate vote was 80-19 in favor.

Warsh told a congressional committee last week that he would be an independent chair, but Trump has continued to say he expects his choice to reduce the Fed's key rate.

Yet on Wednesday Powell said the “center” of the committee was moving away from a bias toward cutting rates toward a more neutral stance. Three policymakers dissented from Wednesday's statement because they wanted to make that shift more explicit. A fourth official, Stephen Miran, voted to cut rates immediately, but he will be replaced by Warsh.

The four dissenting votes were the most since October 1992.

"A 34-year high in dissents is not exactly the welcome mat Mr. Warsh was hoping to see upon his arrival," Stephen Douglass, chief economist at NISA Investment Advisors, said in a note to clients. “He might want to wear a hard hat at his first meeting, and not only because the (Fed building) is still under construction.”