Warsh Fed Hearing: Key Takeaways on Powell Probe, Rate Cuts

Kevin Warsh, President Trump's nominee for Federal Reserve chair, faced the Senate Banking Committee on Tuesday in a hearing that previewed a potential break from more than a decade of Fed orthodoxy — and exposed the political roadblock keeping him from the job. His path to confirmation remains blocked by a Republican senator refusing to advance any nominee until the Justice Department drops its criminal probe of current chair Jerome Powell.

What Kevin Warsh said on Federal Reserve independence and policy

1. He pledged independence from Trump — and rejected the "sock puppet" label

Warsh told senators he would act independently of the White House and said Trump never asked him to commit to a specific rate path. "The president never asked me to predetermine, commit, fix, decide on any interest rate decision in any of our discussions, nor would I ever agree to do so," Warsh said. He rejected the "sock puppet" label pressed by Democrats, but declined to answer whether Trump lost the 2020 election, whether the Powell probe was legitimate, or whether the administration's attempt to fire Governor Lisa Cook crossed a line, citing pending litigation.

Sen. Ruben Gallego (D-Ariz.) sharply questioned Warsh's claim that Trump had never demanded rate cuts. "Someone here is lying then," Gallego said.

2. He called 2021-22 inflation a "fatal policy error"

Warsh said the 2021-22 inflation surge was a "fatal policy error" the institution has yet to correct. The framing previews a tougher internal critique of the Powell-era Fed than any sitting governor has offered.

3. He wants to replace the Fed's preferred inflation gauge

Warsh dismissed the Fed's preferred inflation gauge and argued the central bank should pivot to trimmed-mean inflation — a measure stripping out outliers that is running closer to the 2% target than the roughly 3% headline reading.

Trimmed-mean inflation, published by the Dallas Fed, removes the largest price swings in either direction each month to reveal the underlying trend. It typically prints lower than the headline PCE number the Fed currently favors.

The switch would give Warsh rhetorical room to support rate cuts without declaring inflation defeated — aligning with Trump's public demands for looser policy while preserving a claim to analytical independence.

4. He called for "regime change" at the central bank

Warsh pitched sweeping reforms to how the Fed sets policy, communicates, and manages its $6.7 trillion balance sheet. He told the committee the central bank needs "a regime change in the conduct of policy" and a new inflation framework.

"We need a new framework, new tools, and I'd also say, Mr. Chairman, new communications." — Kevin Warsh, Senate Banking Committee hearing

Warsh invoked his former mentor, economist Milton Friedman, to frame the critique. Friedman, he said, "always worried about government officials that lured and hung around with what he called the tyranny of the status quo. Status quo practices and policies are especially harmful when the world is changing this fast."

Sen. Lisa Blunt Rochester (D-Del.) pressed Warsh on whether "regime change" meant firing the presidents of the Fed's regional reserve banks — a theory that has circulated for months. A rotating set of those bank presidents vote on monetary policy, and replacing them with loyalists could accelerate rate cuts. Warsh did not explicitly rule it out.

Markets, the Jerome Powell investigation, and what happens next

5. Markets trimmed rate-cut bets during the hearing

Markets largely looked past the testimony, but bond traders leaned hawkish. The two-year Treasury yield rose about six basis points to 3.79% and the 10-year climbed to 4.29%, as crude oil held above $90 a barrel.

U.S. stocks closed lower on the day. The S&P 500 fell 0.63% to 7,064.01, the Dow dropped 0.59%, and the Nasdaq lost 0.59%, though traders also weighed uncertainty around U.S.-Iran ceasefire talks.

Traders had entered the hearing with modest expectations of near-term easing. Per CME FedWatch, fed funds futures are now pricing roughly a 100% probability of a hold at the April 29-30 FOMC meeting, with an 83% probability of a hold at the May 6-7 meeting. The current federal funds target range is 3.50%-3.75%, and the Fed's March 2026 dot plot pointed to fewer cuts in 2026 than previously projected.

6. Warren raised the Epstein files before the hearing began

Sen. Elizabeth Warren (D-Mass.) told reporters outside the hearing room that Warsh's name appears in the publicly disclosed Epstein files. "Obviously, there's a lot more that the Department of Justice has not exposed, but even in those [files] there are questions that arise about his business dealings and whether there are entanglements between Mr. Warsh and Mr. Epstein on business activities," Warren said. The line did not feature prominently inside the hearing itself but shaped the pre-hearing media environment.

7. The Powell probe is still blocking the vote

Sen. Thom Tillis (R-N.C.) reiterated he will not advance Warsh until the DOJ closes its investigation into Powell's oversight of the Fed's building renovation — costs the administration puts at up to $4 billion against a $2.5 billion estimate. Senate Majority Leader John Thune urged the White House to wrap up the probe; Trump, in a CNBC interview, refused. Powell's term as chair expires May 15, raising the prospect he remains in the role past the deadline.