Fed Succession

Path Clears for Warsh

The US Department of Justice has ended its criminal investigation into Federal Reserve Chair Jerome Powell.

This matters because:

• Republican senator Thom Tillis made the investigation the sole condition for blocking Kevin Warsh’s confirmation as the next Fed chair.
• With the probe dropped, that obstacle is now removed.
• The matter is being handed to the Fed’s internal watchdog, which does not affect Senate procedure.

Powell’s term as the chair of the Federal Reserve ends on 15 May, with Warsh still needing a green light from the Senate Banking Committee. After that, a Senate majority is enough to confirm his nomination.

Probe That Blocked the Process

The probe concerned the cost overruns of the Fed’s headquarters renovation. Republican leaders, including senate majority leader John Thune, had urged the administration to wrap it up.

Legal experts and fellow central bankers around the world criticized the investigation as politically motivated and a breach of central bank independence. This is the reason why Senator Tillis, a Banking Committee member, refused to advance Warsh’s nomination. Tillis is not against Warsh, praising his “impeccable credentials.”

Now that the investigation is shut, Warsh is likely to get the Senate approval quickly.

Sock Puppets and Presidential Wishes

At his Senate Banking Committee hearing on Tuesday, Warsh faced questioning about whether he would resist President Trump, who has repeatedly demanded lower interest rates, saying he would be “disappointed” if the new chair didn’t deliver that.

Democratic Senator Elizabeth Warren warned Warsh could become a “sock puppet,” while he made no commitments on rates. Warsh said that the president has “never instructed” him on policy.

He also argued that Fed independence “has to be earned” by delivering on commitments.

Finances Become a Political Flashpoint

Warsh would be the wealthiest Fed chair in history, with disclosures showing at least $135 million in assets. His filings mention “confidentiality” 190 times, leaving the true extent of his wealth unclear. He earned $13 million in consulting fees last year alone.

Senators pressed him on hundreds of private stakes, including AI, prediction market, and crypto startups. Warsh has agreed to sell at least $100 million within 90 days of confirmation, but Democrats want full transparency on funds whose underlying assets remain undisclosed.

A Chair Gearing for an Overhaul

Warsh’s regime‑change plan survived the Senate hearing intact. He is set to bring big changes to how the Fed operates:

• A new inflation framework —Warsh wants to move away from the Fed’s preferred inflation metric, calling it a “rough swag.” The Fed currently follows the core Personal Consumption Expenditures (PCE) index.
• Ending forward guidance — He argues that years of signaling future rate paths have distorted market expectations and weakened the Fed’s ability to respond to shocks.
• A smaller balance sheet — Warsh is skeptical of the Fed’s $6.7 trillion in assets, saying long‑running purchases have dulled market discipline and encouraged risk‑taking.

A New Way to Lead the Fed

Warsh has outlined a plan to change how the Fed approaches inflation, communication, and the size of its balance sheet. These proposals could revolutionize the way the Fed operates, but also create a rift between other major central banks that are committed to, for example, forward guidance as a key tool in monetary policy.