The Warsh revolution has arrived at the Fed. Mr. Powell won’t stop it: analysis

How do you change the government if the head of the old government does not resign?

This will be a question facing Fed Chairman nominee Kevin Warsh next month once he is confirmed by the Senate, although outgoing Chairman Jerome Powell has confirmed that he will remain as a voting member of the Fed’s Board of Governors indefinitely.

Mr. Powell’s decision to stay on is almost unprecedented in Fed history, but it may not be enough to disrupt Mr. Warsh’s plans. Chairman Powell said at a news conference Wednesday that he has no intention of becoming a “shadow chair” and that his plans for extending his tenure at the Fed are aimed squarely outside the crumbling walls of the infamous Mariner S. Eccles headquarters building.

Mr. Powell’s rejection of the shadow chair proposal is not surprising, given that it was floated specifically to undermine him. Treasury Secretary Scott Bessent proposed the shadow Fed chair plan in October 2024, when he was still a private citizen. Current President Donald Trump was fed up with Powell even before he won that year’s election, and Bessent long ago proposed naming a replacement. “Based on the concept of forward guidance, no one cares anymore what Jerome Powell says,” Bessent said.

President Trump still cares about Powell, but Powell suggested Wednesday that he doesn’t need to worry too much about the former chairman hanging around Warsh.

“There’s only one chair,” Powell said. Like Mr. Warsh, Mr. Powell was appointed by Mr. Trump before Mr. Trump’s growing dissatisfaction.

“I don’t want to be a famous dissident or anything,” he added.

He is instead trying to avoid threatening the Fed’s independence from the Trump administration’s legal attacks on independent central banks. Congress has given the Fed the power to set interest rates without considering politics, and Mr. Powell intends to keep it that way. Otherwise, politicians from all walks of life will be tempted to try to stimulate the economy by cutting interest rates, risking a spike in inflation.

Powell wants to see a final resolution to the criminal investigation that was filed and later dropped by U.S. Attorney for the District of Columbia Jeanine Pirro. She said she plans to appeal the judge’s decision to cancel the subpoena. Sen. Thom Tillis, RN.C., who was a key figure in brokering the deal between Mr. Pirro and Mr. Powell, said Sunday that he believed Mr. Powell was likely to remain in office until his appeal was resolved. That may take several months.

Mr. Powell’s decision to stay at the Fed essentially lumps together his dispute with Mr. Warsh related to Mr. Trump. Mr. Powell will effectively become the board’s nominee to battle Mr. Trump, while Mr. Warsh will work on giving the Fed the stamp of approval.

That might even mean eliminating press conferences like the one Powell spoke at. During his nomination hearing, Mr. Warsh declined to commit to holding a press conference on the same schedule as Mr. Powell. The outgoing chairman acknowledged that his decision would basically be left to Mr. Warsh’s discretion.

“I think our communication is fine, but it would be the most natural thing in the world to consider a different and better way to do it,” Powell said.

The change in communications could extend to perhaps the most notable policy development at Wednesday’s meeting. Three Fed officials opposed the Fed’s decision, arguing against the “accommodative bias” in the Fed’s policy statement. Although these officials agreed with the overall decision to keep rates unchanged, they did not want to suggest that the Fed was still seriously considering cutting rates given the inflation risks from the Iran war. (Mr. Warsh has promised to cut interest rates quickly.)

Powell said such comments are “a form of forward guidance” and a way to let the market know what’s going to happen.

Warsh opposes the practice.

“I generally don’t think the Fed should provide the kind of forward guidance that it is currently doing,” he said in response to questions from Senate Democrats published Tuesday.

In his written comments, Warsh also said he wants to “reform” the Fed’s 12 regional reserve banks. He said he was open to residency requirements that would ensure, for example, that bank presidents are from the districts they represent.

Powell also said he was open to changes at the Reserve Bank. “There’s a back and forth on that,” he said.

The only area where Mr. Powell would draw the line would be firing regional Fed presidents en masse. The president’s allies have floated the idea, and while it is within the board’s authority, it would be unprecedented. Because these presidential transition groups vote on monetary policy, replacing them with allies could be a backdoor way to transfer power to the administration.

“That would be the beginning of the end of the Fed’s ability to independently set monetary policy,” Powell said.

But Mr. Warsh has shown no signs of considering that plan. He told Sen. Lisa Blunt Rochester (D-Delaware) during his confirmation hearing last week that overthrowing the Fed president was not part of his plans for a change of government. What he means by this is a “change in the policy system.”

So, as far as Mr. Powell is concerned, Mr. Warsh’s only major challenge will be building consensus within the Fed on where to set interest rates. Wednesday’s dissent suggests it won’t be easy. But Mr. Powell, who described Mr. Warsh as a failed chairman who chose inflation, went out of his way to say that Mr. Warsh was up to the task.

Powell said the chair’s job is to “build consensus” among the Fed’s voters and “get inside their thinking.”

Mr. Warsh is “very capable and skilled in that area,” Mr. Powell said.