Jill On Money: Warsh named as Fed chair – Should you care?

JILL ON MONEY

The monthslong beauty contest is over: President Donald Trump has named Kevin Warsh to succeed Jerome Powell as Federal Reserve Chair.

Before explaining why you should care, a quick rundown of Warsh's resume:

He served as Fed governor during the financial crisis (2006-2011) but resigned seven years before his 14-year term ended. He was long considered a "hawk" who favored higher interest rates, and his early departure likely stemmed from disagreements with Chair Bernanke - Warsh argued for rate increases, while others preferred keeping rates low to aid crisis recovery. He was a contender for Fed chair in 2017, but then-President Trump named Powell instead. Recently, Warsh has shifted positions, arguing that interest rates are too high. He also believes that government spending is the root of inflation - and that productivity advances from artificial intelligence will push down inflation over time. He supports Trump's policies on tariffs and deregulation as a means to boost the economy and has criticized Powell's handling of the Fed building renovation.

What happens next?

Warsh must be confirmed by the Senate, which may prove difficult. U.S. Sen. Thom Tillis, R-N.C., said that he won't vote to confirm Warsh (or any Fed chair) until the Department of Justice drops its investigation of Powell over the Fed's renovation project.

After receiving a subpoena, Powell said that "the threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President."

If Warsh is ultimately confirmed, he can't unilaterally lower interest rates. The Federal Open Market Committee ( FOMC), consists of 12 members (seven Board of Governors members, plus the New York Fed president, plus four rotating regional Fed presidents) and each vote holds equal weight. The Fed only acts when the majority vote in favor of doing so.

Why should you care about the Fed?

Fed actions impact everything from credit card interest rates to auto and personal/business loans to interest on savings accounts. While it may seem great to lower interest rates to help borrowers, doing so might foster inflation, and if that were to occur, investors would demand higher rates to compensate them for the extra inflation risk.

For the U.S. economy to function efficiently, the Fed needs the freedom to raise interest rates to combat inflation, regardless of the fact that it might slow down the economy and disappoint consumers and politicians.

What's the deal with Fed independence?

The Federal Reserve is an independent, self-funded agency and is not a part of the congressional appropriations process, though it is accountable to the public and to Congress. The bar is high to fire Fed officials: a 1935 Supreme Court ruling found that Fed officials can only be forced out or fired "for cause," which most have interpreted as some sort of crime, like embezzlement or fraud.

Last spring, the Supreme Court seemed to carve out special privilege to the Fed, even as it granted permission for the administration to fire other agency heads, noting that "the Federal Reserve is a uniquely structured, quasi-private entity."

More recently, the Supreme Court held oral arguments on Jan. 21 over whether the president could remove Lisa Cook as a Fed governor. The Administration alleges that Cook lied on a mortgage application, which she categorically denies. In the arguments, some conservative justices seemed unwilling to provide the president with the sweeping power to remove Cook. Until they render a decision, Cook remains a voting member of the FOMC.

Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at [email protected]. Check her website at www.jillonmoney.com.