If Kevin Warsh takes charge of the US Federal Reserve, can it preserve its independence?

Much of the discussion about Warsh has focused on his interest-rate recommendations, which have swung with the political wind. But this is to make a mountain out of a molehill. The Fed’s interest-rate policy is decided by a committee, where the chair is only one voice among many.

The chair’s voice is the loudest, but that is no guarantee. G. William Miller was outvoted in 1979 when he opposed an increase in the Fed’s discount rate. Miller was outvoted by the Federal Reserve Board, not the Federal Open Market Committee (FOMC), since it is the Board that makes the final determination regarding the discount rate. The highly regarded Fed Chair Paul Volcker was briefly outvoted in 1986 when he opposed an interest-rate reduction.

Neither split tarnished the Fed’s reputation, although both episodes diminished the influence of the chair. Both Miller and Volcker exited their positions not long thereafter, which is a cautionary tale for Warsh. The next chair will have to build a consensus to avoid becoming another Miller.

This makes Warsh’s ideas about forecasting the course of the economy a matter of keen interest, because his ideas will be the vehicle for his influence on other Fed governors. At times Warsh seems to have advocated depending less on complicated economic models, career staff and incoming data, favouring a more discretionary approach resting on the tenor of markets.

This sentiment-based approach to investing has been known to work when in the hands of seasoned practitioners, such as Warsh’s mentor, the billionaire investor Stanley Druckenmiller, who came to prominence at George Soros’s Quantum Fund. But it is unlikely to work as a guide to forecasting the medium-term evolution of inflation and employment.

At other times, Warsh seems to be arguing for relying less on trailing economic indicators and more on real-time sources of economic data available, courtesy of the digital revolution. Here, he is onto something. But so are Fed staff members who, in their research, already cite data from the likes of the Billion Prices Project and the HBS Pricing Lab.

Aside from Druckenmiller, the American financial operator who Warsh resembles most closely is J.P. Morgan Sr, who was intimately involved in managing the major banking and financial crises that erupted periodically in the US prior to the Fed’s establishment.

Morgan’s preferred approach was to organize lifeboat operations in which stronger banks provided the liquidity needed to keep their weaker brethren afloat and calm financial markets. In one famous episode in 1907, Morgan summoned the heads of leading New York banks and locked them in his private library until they agreed to provide funds to bail out other solvent but shaky financial institutions.

Warsh, for his part, played a significant role in brokering the acquisition of Bear Stearns by JPMorgan Chase in 2008. Ultimately, this selective triage did nothing to stem a systemic financial crisis. For that, large-scale liquidity injections by the central bank were required, the very kind of credit injections about which Warsh has expressed reservations.

Back in 1907, participants in financial markets similarly worried about relying on J.P. Morgan’s private-sector approach to resolving financial crises. Those concerns led directly to the establishment of the Federal Reserve in 1913 (Morgan died the same year).

Relatedly, Warsh argues that the Fed should focus on its dual mandate ensuring price stability and maximum employment while avoiding mission creep. This would appear to come perilously close to abjuring the Fed’s responsibility for banking supervision and financial stability, which could encourage additional loosening of the Fed’s regulatory reins.

Warsh’s view indicates a preoccupation with moral hazard, the concern that Fed balance-sheet expansion encourages risky behaviour by banks, inflates asset prices and promotes profligacy on the part of an already deficit-prone federal government. But while moral-hazard risk is a valid concern, so is meltdown risk. The key to successful central banking is not to privilege one over the other.

The strongest argument for the Fed to focus on its core mandate—understood to encompass stable prices, full employment and financial stability—is that preserving the monetary authority’s independence depends on it. Independence is politically viable only when paired with accountability— i.e., only when the individuals and agency to which public functions are delegated are required to explain and justify their actions.

The more complex the mandate, the more difficult it is for the agency’s political masters—US Congress and the public—to evaluate the correspondence between those decisions, on one hand, and its mandated goals, on the other. The harder it then is for independent policymakers to defend their actions credibly.

The irony is that Warsh, nominated by a president who values fealty above all else, may be remembered as a key protector of central-bank independence. ©2025/Project Syndicate

The author is professor of economics and political science at the University of California, Berkeley, and the author, of the forthcoming ‘Money Beyond Borders: Global Currencies From Croesus to Crypto’.