A New Leader — and a New Showdown — at the Fed

Summary

Podcast Summary

Podcast: The Daily
Episode: A New Leader — and a New Showdown — at the Fed
Date: May 14, 2026
Host: Michael Barbaro
Guests: Colby Smith (The New York Times), Various Federal Reserve Experts

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Episode Overview

This episode explores a dramatic moment at the Federal Reserve (the Fed), where a contentious leadership transition is brewing. President Trump has succeeded in replacing Jerome Powell—his adversarial Federal Reserve Chair—with his own nominee, Kevin Warsh. However, Powell makes a surprising decision: he will not retire, instead remaining on the Board of Governors, creating an unprecedented, potentially volatile “two-leader” situation. The episode dissects how years of political and legal maneuvering have impacted the Fed’s independence, the implications of Powell’s unprecedented move, and whether Warsh will actually bring the “regime change” Trump desires.

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Key Discussion Points & Insights

1. The Unprecedented Powell–Warsh Overlap (00:31–03:32)

• Senate confirms Kevin Warsh as Chair, but Powell announces he will stay on as a Fed governor despite being removed as Chair.
  • Colby Smith: “Powell, whom the president has hated with the heat of a thousand suns... is refusing to entirely cede the stage, even though he's no longer going to be chairman.”
  • Michael Barbaro: “It's created this totally unusual scenario... Old and new Fed chairs trying to somehow coexist inside the central bank in what is quite likely gonna be a very messy situation.” (02:26)

Notable Moment: This is the first situation like this since the 1940s—“the last time this happened was... at the request of... Harry Truman. This is obviously a very different situation.” (02:48)

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2. Trump’s War with the Fed (03:32–05:20)

• Trump’s public antagonism toward Powell shaped the standoff. He launched a pressure and investigation campaign to force Powell out.
  • Donald Trump: “We have a fool at the Federal Reserve. He's an absolute fool.” (03:25)
  • “He should be fired. Guy's grossly incompetent.” (04:03)
• Legal threats included a criminal investigation into Fed headquarters renovation costs, widely seen as “politically charged” and spurious.

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3. Senatorial Obstruction & Political Calculus (05:20–08:18)

• Republican Senator Thom Tillis refused to advance any Fed nominee while Powell faced ongoing investigation—a blockade that stalled Trump’s ambitions.
  • Tillis: “I cannot and I will not vote to support anyone on the Federal Reserve in my remaining tenure in the U.S. senate.” (05:33)

Notable Moment: Tillis’ pivotal role on the Senate Banking Committee made his opposition a real obstacle.

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4. The Investigation Collapses, But Powell Won’t Go (09:35–12:17)

• With time running out as Powell’s term as chair neared its end, prosecutors “caved” to mounting criticisms and ended the investigation (April 24).
  • Jeanine Pirro (US Attorney): Announces she’s dropping the case, but “would not hesitate to restart a criminal investigation should the facts warrant.” (10:41)
• With the legal threat gone, Senator Tillis lifts his blockade, paving Warsh’s path—but Powell still refuses to fully step aside.
  • Jerome Powell: “After my term as Chair ends on May 15, I will continue to serve as a governor for a period of time to be determined.” (11:44)

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5. Why Stay? Independence—and Leverage (12:17–16:03)

• Powell’s motivations are institutional, not personal: “It is so important for our economy, for the people that we serve, that they can depend... on a central bank that operates... free of political influence.” (12:36)
• By remaining on the board, Powell prevents Trump from appointing another loyalist—protecting Fed independence.
  • Expert: “By staying on, Powell blocks Trump’s ability to nominate another person to the Fed’s Board of Governors... It effectively reduces Trump’s influence over the board.” (13:35)

Notable Quote: “He really believes this is about the institution and the stakes are simply too high for him to leave.” (15:06)

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6. The Awkward Future: Two Power Centers at the Fed (16:03–17:15)

• The episode acknowledges the awkwardness and confusion likely to follow—Powell lingering in proximity while Warsh tries to assert authority.
  • Expert: “It has all the makings of an incredibly awkward environment... People are not really going to understand who is in charge at this crucial moment.” (16:03)

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7. Who is Kevin Warsh? (18:44–22:33)

• Warsh, a former Fed governor (2006–2011) during the global financial crisis, left over disagreements about the Fed’s interventionism—particularly its use of the balance sheet.
  • Expert: “[The] balance sheet is really emblematic of everything that has gone wrong at the central bank.” (20:39)
• Warsh criticizes expansive asset purchases, arguing they fuel inequality & inflation, and edge the Fed into “politics.”
  • Kevin Warsh: “The Fed needs to get out of the fiscal business, focus on the monetary business.” (22:08)

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8. Warsh’s Critique vs. Economic Reality (23:06–25:45)

• Warsh’s views resonate among some policymakers, but many at the Fed argue that aggressive balance sheet operations were essential in both 2008 and 2020.
  • Expert: “They argue that this balance sheet tool was absolutely crucial to... ensuring the economic recovery in the aftermath of the crisis.” (25:12)

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9. Warsh’s Hawk Turned Dove—Or Trump Yes-man? (25:45–29:31)

• Traditionally, Warsh was an inflation hawk, skeptical of low rates—until being considered for Fed Chair, when his stance appeared to soften.
  • Expert: “This marked a real flip flop, given his past stance... people started to ask whether this was politically motivated.” (27:00)
• Warsh faces a credibility dilemma: does he maintain independent thinking or follow Trump’s wishes to cut rates?
  • Expert: “Does he establish his own credibility and risk angering the President, or... do what the President wants... and then internally his own credibility is undermined?” (29:00)

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10. Will There Be “Regime Change”—Or More of the Same? (30:02–32:57)

• Given high inflation and geopolitical uncertainty, economic fundamentals do not justify rate cuts. Warsh’s first test as chair is looming.
  • Expert: “No one expects him to be able to push through interest rate cuts at that moment.”
• Warsh may find himself aligned with Powell, possibly facing Trump’s ire—and Powell’s continued presence as a check.
  • Colby Smith: “Kevin Warsh... is gonna find himself taking a Powell like position on interest rates, resisting the President’s demands to cut them, and... the President’s gonna become furious...” (30:02)
  • Expert: “How much runway will Trump give his Fed chair pick?” (30:24)

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11. Powell’s Risk: Is Defending Independence Itself Political? (32:14–34:44)

• Powell’s decision is controversial: by staying to oppose presidential encroachment, does he end up politicizing the Fed himself?
  • Colby Smith: “By staying on to fight the President is ultimately, whether you agree with it or not, a political decision... Is he making the Fed more political by doing this?” (32:57)
  • Jerome Powell: “I don’t see how this will interfere. My intention is not to interfere... You try to collaborate with the chair and try to support the chair when you can. When you can’t, you can’t...” (33:16, 33:55)
• The commentators liken the new dynamic to the partisan strategies and timing familiar in Supreme Court vacancies—a sign of “politics infiltrating the central bank.” (34:25)

Notable Quote: “There really isn’t any going back from this.” (34:40)

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Memorable Quotes (with Timestamps)

• “Powell, whom the president has hated with the heat of a thousand suns... is refusing to entirely cede the stage, even though he's no longer going to be chairman.” – Colby Smith (02:06)
• “We have a fool at the Federal Reserve. He's an absolute fool.” – Donald Trump (03:25)
• “This unprecedented action should be seen in the broader context of the administration's threats and ongoing pressure.” – Jerome Powell (07:12)
• “After my term as Chair ends on May 15, I will continue to serve as a governor for a period of time to be determined.” – Jerome Powell (11:44)
• “It is so important... that they can depend over time on a central bank that operates... free of political influence.” – Jerome Powell (12:36)
• “The Fed needs to get out of the fiscal business, focus on the monetary business.” – Kevin Warsh (22:08)
• “No one expects him [Warsh] to be able to push through interest rate cuts at that moment... Him supporting that would look like he was the President’s policy lapdog.” – Expert (27:45, 28:57)
• “By staying on to fight the President... does he risk himself politicizing the Fed?” – Colby Smith (32:57)
• “There really isn’t any going back from this.” – Colby Smith/Expert (34:40)

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Timeline of Important Segments

• 00:31 – Senate confirms Warsh, Powell refuses to retire
• 03:14 – Trump’s public feud with Powell, pressure campaign
• 05:32 – Senator Tillis blocks all Fed nominees over investigation
• 09:35 – Prosecutors investigate Fed construction, raise stakes
• 10:19 – Investigation dropped, path cleared for Warsh
• 11:37 – Powell’s defiant final press conference
• 12:36 – Powell outlines institutional risks, states rationale for staying
• 16:03 – Speculation on internal dynamics at Fed post-transition
• 18:44 – Warsh's career and critique of Fed policy
• 21:22 – Warsh’s economic and political critique of the balance sheet
• 23:06 – Debate on whether Warsh’s criticism is accurate
• 25:45 – Warsh’s changing stance on rates under Trump
• 29:31 – The credibility dilemma for Warsh as new chair
• 30:24 – Open questions about Trump’s patience and Warsh’s autonomy
• 32:14 – Does Powell’s decision politicize the Fed?
• 34:40 – Segments likening Fed's new politics to Supreme Court dynamics

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Conclusion

This episode provides a detailed, clear-eyed look at how the Fed—often seen as above politics—has become a battlefield for presidential power, institutional independence, and economic orthodoxy. With Powell refusing to go quietly and Warsh caught between past ideology and present political expectations, the Federal Reserve heads into a period of high-stakes uncertainty. The ultimate question: Will the new dynamic at the Fed protect the institution, or mark a lasting turn toward politicization?

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This summary covers all essential content from the episode and provides key insights, quotes, and a structured breakdown for listeners seeking a comprehensive, engaging overview.

Transcript

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[Michael Barbaro]

the New York Times. I'm Michael Balvaro. This is the Daily. On Wednesday afternoon, after a year of harassing and threatening the chairman of the most powerful financial institution in the country, President Trump finally replaced it sort of today. Colby Smith on how the president ended one standoff at the Federal Reserve only to create a new one. It's Thursday, may 14th.

[Senate Announcer]

The ayes are 54, the nays are 45. The nomination is confirmed. The president will be immediately notified of the Senate's action.

[Narrator]

The Senate is confirming Kevin Warsh is the next chair of the Federal Reserve. The move puts President Trump's pick in charge of interest rate policy during a time of high prices and economic uncertainty.

[Colby Smith]

Colby, we find ourselves in a very curious place.

[Michael Barbaro]

Just a few hours ago, the US

[Colby Smith]

Senate confirmed President Trump's choice to replace

[Michael Barbaro]

Jerome Powell as chairman of the Federal Reserve.

[Colby Smith]

Powell, whom the president has hated with the heat of a thousand suns. And yet Powell is refusing to entirely see the stage, even though he's no longer going to be chairman of the Fed. He's made this very surprising decision to stay on at the Fed, not retire.

[Michael Barbaro]

And it's created this totally unusual scenario.

[Colby Smith]

Old and new Fed chairs trying to somehow coexist inside the central bank in what is quite likely gonna be a very messy situation.

[Michael Barbaro]

So talk us through the events that got us to this moment over the past few weeks.

[Federal Reserve Expert 1]

So it's a really complicated moment for the Federal Reserve. Jerome Powell's decision to stay on at the Fed breaks with really decades of tradition. The last time this happened was in the late 1940s, and that was at the request of the president at the time, Harry Truman. So this is obviously a very different situation. As you said, Trump and Powell, they've been at loggerheads for most of of Trump's second term.

[Federal Reserve Expert 2]

And I can't remember a time in

[Federal Reserve Expert 1]

history in which a Fed chair stayed on past the end of his tenure

[Federal Reserve Expert 2]

when the president explicitly didn't want him to.

[Senate Announcer]

Mm.

[Donald Trump]

We have a fool at the Federal Reserve. He's an absolute fool.

[Federal Reserve Expert 2]

And this whole decision stemmed from an extraordinary pressure campaign launched by President Trump against Powell and the Fed for Powell's refusal to lower interest rates.

[Donald Trump]

Now we have a man that just refuses to lower the Fed rate, just refuses to do it. And he's not a smart person. No, he's. Something wrong with him. It's just sweet. I'll be honest. I'd love to fire his ass. He should be fine. Guy's grossly incompetent.

[Federal Reserve Expert 2]

And it really took on a whole life of its own.

[John Caramanica]

President Trump's long simmering war against Jay

[Senator Thom Tillis]

Powell, the Federal Reserve chair. It has officially gone nuclear.

[Kevin Warsh]

One of President Trump's top targets, the chairman of the Federal Reserve, is now under criminal investigation.

[Federal Reserve Expert 2]

The investigation involves Powell's testimony into the cost of building renovations at the Fed. And it culminated in this criminal investigation launched by the Justice Department against Powell and the Fed over these renovations of its headquarters in Washington. And this, in a lot of ways, just ended up backfiring spectacularly against Trump. It looks fishy.

[Senate Questioner]

Why do you say that?

[Federal Reserve Expert 2]

Doesn't look right.

[Political Commentator]

If you wanted to design a system to cause interest rates to go up and not down, you would have the Federal Reserve of the United States and the Executive branch of the United States get into a pissing contest.

[Political Commentator 2]

I hope they have a smoking gun or something, because I don't think you trifle with the Federal Reserve, with the

[Federal Reserve Expert 2]

central bank, because the existence of this investigation ended up becoming a big impediment to Trump getting exactly what he's wanted for a long time, which is Powell to leave and for him to be able to put in a new person as Fed Chair.

[Political Commentator]

Right.

[Colby Smith]

And Trump has, by this point, picked this person he wants to be his new Fed chair, Kevin Warsh, whom Trump nominated as this investigation drama is playing out.

[Federal Reserve Expert 2]

Exactly.

[Senator Thom Tillis]

Until the investigation is resolved, I cannot and I will not vote to support anyone on the Federal Reserve in my remaining tenure in the U.S. senate.

[Federal Reserve Expert 2]

And what happened here is that Thom Tillis, a retiring Republican senator from North Carolina, said he would not support any of Trump's Fed nominees until the legal threats into Powell had ended.

[Senator Thom Tillis]

The problem that I have here is that we had some US Attorney with a dream or Assistant US Attorney, thinking it would be cute to bring Chair Powell under an investigation just a few months before the position was going to be open.

[Federal Reserve Expert 2]

And this was a really potent tool because Tillis had a pivotal vote on the Senate Banking Committee, which oversees the confirmation process for Fed nominees.

[Colby Smith]

He literally could block Trump's pick to replace Powell.

[Federal Reserve Expert 2]

Exactly. Just given the slim majority that Republicans have his opposition to allowing the confirmation process to proceed created this blockade of sorts that put on pause something that Trump had really, really wanted.

[Senator Thom Tillis]

Until the matter is solved, I'm a.

[Federal Reserve Expert 2]

And I think what's important to remember about this is that the grounds of the investigation were so spurious. It was about this renovations project that had gone millions of dollars over budget,

[Federal Reserve Expert 1]

but cost overruns, they're not a crime. And I think it was clear from the very get go that this investigation was really politically charged.

[Jerome Powell]

This unprecedented action should be seen in the broader context of the administration's threats and ongoing pressure.

[Federal Reserve Expert 1]

Powell says as much in this extraordinary statement. Shortly after the investigation went public, we talked about it the last time I

[Federal Reserve Expert 2]

was on the show.

[Colby Smith]

Right.

[Jerome Powell]

This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions, or whether instead monetary policy will be directed by political pressure or intimidation.

[Federal Reserve Expert 2]

And a short while later, we had

[Federal Reserve Expert 1]

a federal judge also coming out strongly against the investigation.

[Federal Reserve Expert 2]

The this judge basically said in no uncertain terms that this was about pressuring and harassing Powell so the President could install someone who's more amenable to his demands. So you had all of this opposition mounting to this investigation, and it was quite clear it was on really shaky legal footing. So the question all along was, when would Trump blink? How long would they continue to pursue an investigation that really had no future, especially when it was jeopardizing this thing that Trump had long wanted.

[Colby Smith]

Right. Suddenly, Trump was being asked to choose between revenge against the Fed chair he hates and replacing that Fed chair he hates. And in this period you're describing, he

[Michael Barbaro]

was kind of choosing revenge over replacement.

[Federal Reserve Expert 2]

Absolutely. And there was a time element here. Powell's term was up May 15, and they were running out of time to get Trump's nominee, Kevin Warsh, into that role. So we're all waiting to figure out how they're gonna proceed here. And we keep getting signs that they're nowhere close to dropping this investigation.

[Jeanine Pirro]

The Chairman says, no, no, you're attacking the independence of the Federal Reserve. That's not what we're doing. We're doing our job.

[Federal Reserve Expert 2]

U.S. attorney for the District of Columbia, Jeanine Pirro, who launched this investigation, continues to say she's pursuing this investigation.

[Jeanine Pirro]

Federal prosecutors made an unannounced visit to the Federal Reserve yesterday as part of their investigation into Fed Chair Jerome Powell. What's the latest on that?

[Federal Reserve Expert 2]

Yeah, this was highly unusual. Members of her team, at one point, the Fed itself, to try to visit the active construction site and poke around a little bit. There was just a lot of mixed messages at this point. And it started to impact, I think, how Powell began to speak about what he was going to do at the Fed.

[Jerome Powell]

I have no intention of leaving the board until the investigation is well and truly over with transparency and finality. On the question of whether I will then continue to serve as a governor after my term ends and after the investigation is over, I have not made that decision yet.

[Federal Reserve Expert 2]

So Powell has one tool of leverage left in his arsenal. His term as chair ends May 15, but technically he can stay on as a member of the Fed's Board of Governors. This is a seven person board who makes really important decisions about interest rates and policy and internal staffing decisions at the Fed. So it's an important position. And Powell had been really vague about what he planned to do.

[Jeanine Pirro]

The Justice Department is calling off one of its most controversial investigations.

[Senator Thom Tillis]

Jeanine Pirro says she's dropping her investigation, looking at Jay Powell and the Federal Reserve construction.

[Federal Reserve Expert 2]

And finally, on April 24th. So just a couple weeks before the end of Powell's term, Pirro finally caves and announces that she's dropping the case.

[Narrator]

U.S. attorney Jeanine Pirro added, I will not hesitate to restart a criminal investigation should the facts warrant doing so.

[Federal Reserve Expert 2]

You just heard she keeps open the option of starting it again at any point, but she essentially says that she's wrapping up her investigation. She kind of hands off the job to the Inspector General at the Fed.

[Senator Thom Tillis]

I am prepared to move on with the confirmation of Mr. Walsh. I think he's going to be a great Fed chair.

[Federal Reserve Expert 2]

And that outcome was sufficient for Tillis to end his blockade against Trump's Fed nominee, Kevin Warsh. But it wasn't enough for Powell.

[Jerome Powell]

I welcomed the announcement last Friday by the U.S. attorney for the District of Columbia that she had closed the criminal investigation. She also noted, however, that she would not hesitate to restart the investigation at

[Federal Reserve Expert 2]

the end of April.

[Federal Reserve Expert 1]

In his last press conference as chair, Powell makes clear he is not convinced whatsoever that the administration's investigation is over.

[Jerome Powell]

My decisions on these matters will continue to be guided entirely by what I believe is in the best interest of the institution and the people we serve. After my term as Chair ends on May 15, I will continue to serve as a governor for a period of time to be determined.

[Federal Reserve Expert 1]

And because of that, he is using his one tool of leverage.

[Federal Reserve Expert 2]

He's going to stay on at the Fed.

[Jerome Powell]

You know, I'm literally staying because of the actions that have been taken. I had long planned to be retiring and, you know, the things that have happened in, really in the last three months have, I think, left me no choice but to stay until I see them through at least that long.

[Federal Reserve Expert 2]

So that threshold for Powell in terms of the investigation being well and truly over with transparency and finality, that's definitely not reached. But the bigger reason, he says, is that Trump's ongoing attacks on the institution have imperiled the Fed in a pivotal way.

[Jerome Powell]

Additional such actions. I worry that these attacks are battering the institution and putting at risk the thing that really matters to the public, which is the ability to conduct monetary policy without taking into consideration political factors. It is so important for our economy, for the people that we serve, that they can depend over time on a central bank that operates that way free of political influence.

[Federal Reserve Expert 2]

It has risked the Fed becoming more politicized, and it has risked the US Economy being undermined. For him, it's not just about him and his future and the investigation. It's about the future of the central bank and its ability to operate free of political meddling.

[Colby Smith]

And how does staying on the Fed's Board of Governors, but not leading it, in Powell's mind, ensure that the Fed remains independent and. And can withstand these attacks from the president?

[Federal Reserve Expert 2]

So, at the most basic level, by staying on, Powell blocks Trump's ability to nominate another person to the Fed's Board of Governors. Now, this is important because the more people on the Board of Governors who are willing to do the president's bidding, the more likely it is that the institution becomes an extension of the administration. Now, Trump, of course, had the ability to name a new Fed chair in replacing Powell. But with Powell staying on, Trump would no longer be able to add another governor. And so what it effectively did was reduce Trump's influence over the board. And it's really important to underscore that the Board of Governors is really powerful. These policymakers are absolutely pivotal in the direction of interest rates, in the direction of bank regulatory policy, in staffing changes inside the Fed, and also as it relates to the regional bank presidents that sit across the country. So they play a really crucial role in shaping how the Fed operates. So having a majority of supporters on the board can really sway the institution one way or the other, because Powell

[Colby Smith]

linked his decision to stay on the board to the investigation into the Fed. I guess I have to ask, does remaining in any way protect him from that investigation being reopened legally?

[Federal Reserve Expert 2]

So, from a legal standpoint, staying on doesn't really change much in terms of the investigation and his ability to be the subject of any kind of criminal probe on the margins. He is conferred benefits and protection by being a sitting governor. A president can't just remove him at will. So that stands in his favor. What staying on really shows is that this is bigger than the investigation itself. He really believes this is about the institution and the stakes are simply too high for him to leave.

[Colby Smith]

So given that the reality that sticking around on the board doesn't really offer much of a legal shield for Powell, it seems we're pretty much taking him at his word here that he wants to stay on to more broadly protect the Fed from Trump's encroachments and keep the Fed looking like basically Jerome Powell's

[Michael Barbaro]

version of the Fed.

[Federal Reserve Expert 2]

Right. And I think there's going to be this tension right from the get go where you basically have Powell stepping down his chair, moving his offices inside the Feds building a couple offices down from his old one, this new guy coming in, Kevin Warsh. And people really don't know how it's going to work. Powell has said he's going to keep a low profile as a governor, but people are going to pay attention to him when he speaks up, either inside the room ahead of rate decisions or if he ever makes a speech publicly. It has all the makings of an incredibly awkward environment where I think people are not really going to understand who is in charge at this crucial moment for the central bank. And I think what adds to the awkwardness here is that the person replacing Powell, Kevin Warsh, is a huge critic of him and everything he's done in his tenure as chair. And he has gone so far as to call for regime change. And the question on everyone's minds is how far is he going to push it?

[Michael Barbaro]

We'll be right back.

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[Colby Smith]

So, Colby, tell us about Kevin Warsh, this incoming Fed chair, and the basis for his critique of Powell and Powell's Fed.

[Federal Reserve Expert 2]

So this is a bit of a homecoming for Warsh.

[Federal Reserve Expert 1]

He served as a governor at The

[Federal Reserve Expert 2]

Fed between 2006 and 2011, and this overlapped with the height of the global financial crisis. And he was pivotal in crafting the Fed's response to that moment. And that's where really the source of his criticism against the central bank started

[Colby Smith]

to brew during this period.

[Federal Reserve Expert 2]

During this period. He ended up leaving in 2011 over a disagreement about how interventionist the Fed had become in financial markets and in the global economy because of its response to the financial crisis.

[Colby Smith]

Hmm. What specifically was his criticism of the Fed's intervention starting after the financial crisis if he himself was highly involved in it?

[Federal Reserve Expert 1]

So if you think back to the 2008 crisis, banks weren't lending. You had bank failures.

[Federal Reserve Expert 2]

It was a kind of a full stop on the economy.

[Federal Reserve Expert 1]

So the Fed, they did two things. First, they drove interest rates down to zero, but that wasn't enough to stabilize things. So they did something else highly unusual at the time. They started buying up huge quantities of government bonds and mortgage backed securities that increased their portfolio of holdings, otherwise known as the balance sheet. And Warsh, he was on board for this initial response, but from his perspective, the Fed eventually took it too far. And I think it's important to look at the numbers here because before the 2008 financial crisis, the Fed's balance sheet was less than a trillion. And by the end of the crisis,

[Federal Reserve Expert 2]

it was over 4 trillion.

[Colby Smith]

Wow.

[Federal Reserve Expert 2]

So 4x exactly. And it got even bigger. And this is the crux of his criticism about the Fed as it stands today. After the pandemic, the balance sheet peaked at close to $9 trillion. It's now somewhere around six and a half trillion.

[Federal Reserve Expert 1]

And for Warsh, the balance sheet, it's really emblematic of everything that has gone wrong at the central bank.

[Federal Reserve Expert 2]

Since he left it, the Fed balance

[Kevin Warsh]

sheet has played a particularly, I think, unhelpful role in.

[Federal Reserve Expert 2]

In his recent Senate confirmation hearing, he

[Federal Reserve Expert 1]

says that there are several reasons why

[Federal Reserve Expert 2]

this tool is problematic.

[Federal Reserve Expert 1]

First and foremost, he makes the case that expanding the balance sheet is actually bad for the US Economy. He says it exacerbates inequality.

[Kevin Warsh]

The Fed has an interest rate tool and a balance sheet tool. My view is the interest rate tool gets in the cracks. It's fairer. The balance sheet tool disproportionately helps those with financial assets. The interest rate tool hits the entire economy.

[Federal Reserve Expert 1]

And he also warns that it risks making inflation worse.

[Kevin Warsh]

Had the balance sheet not been brought from the $800 billion level when I showed up at the Fed in 2006 to an order of magnitude higher, I think interest rates could be lower, inflation could be better, and the economy could be stronger.

[Federal Reserve Expert 1]

But his critique, it goes beyond economics.

[Kevin Warsh]

The big balance sheet has become an ordinary recurring force, I think has been quite unhelpful, and it's part of the reason why the Fed is in the business of politics.

[Federal Reserve Expert 1]

He also thinks that when the Fed does this kind of stimulus, it creeps outside of its congressional mandate. And he says that when the Fed does this, it potentially threatens the Fed's credibility and its independence.

[Kevin Warsh]

We're going to have to find out a way in which we can take the balance sheet and make it smaller, because a large balance sheet where the Fed owns more outstanding debt than many parts of the financial markets, that's fiscal policy in disguise. Fed needs to get out of the fiscal business, focus on the monetary business, so the Fed can deliver on the remit you gave us.

[Federal Reserve Expert 1]

So when Warsh talks about regime change, a big part of what he means by that is redefining how the Fed should operate in the economy and the global financial system.

[Federal Reserve Expert 2]

What he's trying to do here is

[Federal Reserve Expert 1]

to minimize, I think, how intervention the Fed really is in a lot of ways. And for him, that would not only reduce the degree of economic harm caused by the central bank, but it would also rein in this mission creep that he sees as a threat to the Fed's institutional credibility.

[Colby Smith]

Simple question. Is Warsh right? And let me get even more specific, is he right about inflation? We are living through still a rather inflationary era in American financial life. So is he correct that the Fed played a role in creating that?

[Federal Reserve Expert 2]

So I think it's a complicated answer, unfortunately, because there were a lot of reasons to explain the high inflation environment that we're in today. So for Warsh he has in hand a very clear example of how the Fed's overreach has created inflation and caused distortion in financial markets. And he points out to the pandemic in 2020. The Fed steps in forcefully. It lowers rates to zero, starts buying unlimited government bonds. And the response eclipsed anything that we saw during the 2008 global financial crisis. And for Warsh, the problem was, is that the Fed kind of continued this extraordinary support for too long. And even some officials at the Fed have kind of come around to this idea that they could have stopped buying bonds earlier. And I think that is because this episode created the worst inflation that we had seen in four decades. And that all happened under Powell's watch. For supporters of Powell, there are other things that you can point to to explain this inflation situation, such as, because

[Colby Smith]

we covered it, President Biden's large stimulus. He wrote checks to Americans during the pandemic.

[Federal Reserve Expert 2]

Exactly. There was an exorbitant amount of support provided by to Americans at a time, and this is perhaps most important, that supply chains were shuttered. So you had all of this demand with constrained supply. And this mismatch created higher prices, higher prices. And so this became the kind of opening, I think, for critics against Powell and the Fed to say that he had led the institution astray.

[Colby Smith]

And what about Warsh's kind of secondary critique here, which is that through these huge interventions, Howells Fed has overstepped its rule in a way that's just bad for everybody. Is that view widely held?

[Federal Reserve Expert 1]

So it's an argument that has definitely gained traction. We've heard something similar from Treasury Secretary Scott Bessant, specifically as it relates to the balance sheet and some of the interventions into financial markets that the Fed did back in 2020. But I'm not really sure it carries much weight inside the central bank. They argue that this balance sheet tool was absolutely crucial to getting the financial system functioning again and ensuring the economic recovery in the aftermath of the crisis.

[Colby Smith]

So that's Warsh's broad critique of Powell's Fed. It obviously appeals, as you said, to Trump. But how does Warsh's view of the Fed line up with Trump's determination to cut interest rates? There's an assumption out there that Trump would never replace Powell with anyone who wasn't going to cut the interest rate, because that's in such a singular way what Trump wanted and Powell refused to deliver. So what is war saying about that?

[Federal Reserve Expert 2]

So what's really interesting about Warsh is that his whole history is someone who's been highly skeptical of lower rates. And he's someone who was kind of branded as this inflation hawk, someone who was incredibly worried about price pressures in the economy and always wanted the Fed to keep in mind the risks of higher inflation. And what that typically resulted in is him pushing back on the need for the Fed to cut interest rates more than anything else. And that's something that he had been consistent on basically up until the point that he started to be considered to become Powell's replacement.

[Colby Smith]

And then what happened?

[Federal Reserve Expert 2]

And then we start to see a

[Federal Reserve Expert 1]

shift in tone from him. He comes up with all these different reasons why interest rates should be lower. And this marked a real flip flop, given his past stance. And it started to raise these questions among people who watched the Fed closely about what was behind this seeming flip flop from war.

[Federal Reserve Expert 2]

People started to ask whether this was politically motivated and perhaps this was why

[Federal Reserve Expert 1]

Trump chose him to be his nominee to replace Powell.

[Colby Smith]

Right. How much does Powell remaining on the board of governors? To bring us back to the first part of our conversation, how much harder is that going to make it for war to cut interest rates if he wants to, in fact, do that in the coming months or years?

[Federal Reserve Expert 2]

I think actually it's not necessarily so much about Powell staying here, but the economic environment completely shifting against the need for cuts in the last couple of months.

[Federal Reserve Expert 1]

So Powell's presence in and of itself

[Federal Reserve Expert 2]

certainly does not help because he is someone who does not see an urgent need for the Fed to lower interest rates. And this is someone who obviously is respected across the committee. So his views on that matter. But cutting rates at this time would be economically disastrous, according to most officials at the Fed. They see inflation risks rising because of this war. We have no idea when that's going to end. Oil prices are higher. And this is not an environment where lower interest rates are going to help whatsoever. If anything, it's going to make things worse. And so this puts Warsh in an incredibly uncomfortable position. His first meeting as chair is going to be in June, and no one expects him to be able to push through interest rate cuts at that moment. People don't even actually know if he is going to pursue that because doing so would undermine his credibility so directly. And because the economic environment does not call for cuts. Him supporting that would look like he

[Colby Smith]

was the President's policy lapdog.

[Federal Reserve Expert 2]

Exactly. And he spent his entire confirmation hearing basically trying to disabuse lawmakers of the notion that he was going to operate as Trump's sock puppet. This is this big credibility issue that's going to loom large over him. And he's going to be faced with this choice come that first meeting, does he establish his own credibility and risk angering the President or does he do what the President wants him to do and then internally his own credibility is undermined?

[Colby Smith]

Fascinating. And what do we suspect he will do?

[Federal Reserve Expert 2]

I think Warsh has made clear that he is someone who does not like inflation. That I just don't think that we're going to see him depart from that so dramatically. No Fed chair wants to be remembered as the. A Fed chair who led the economy down a bad path. And that's gonna, I think, going to be the thing that continues to kind of moderate how he behaves and what he ends up pursuing in terms of rates.

[Colby Smith]

What you're outlining is that Kevin Warsh, despite all his promises of delivering change at the Fed, is gonna find himself taking a Powell like position on interest rates, resisting the President's demands to cut them and, and becoming Powell. Like in the fact that the President's gonna become furious with him that he's not getting the job done.

[Federal Reserve Expert 1]

Yes, exactly.

[Federal Reserve Expert 2]

I think that the big question for everyone is just how much Runway is Trump going to give his Fed chair pick? Is he going to give him a couple of months to settle in and establish his own credibility and give him the okay to not necessarily vote for lower interest rates, or is he going to come right out of the gate and attack him for not being able to deliver? The thing that he has kind of made clear was the precond for whoever he was going to give the job to. And I think this is really gonna come to a head as early as mid June, which is the first meeting that Warsh is gonna preside over as chair. And we could be in a situation where Warsh is voting alongside Powell to

[Federal Reserve Expert 1]

hold rates steady and that's not gonna look like the regime change that he talked about.

[Colby Smith]

And that would start to perhaps change Powell's calculation.

[Senate Announcer]

No.

[Colby Smith]

About staying on the board. Because suddenly he will have the knowledge that the person replacing him is not there to blow up the Fed and remove its independence. Does that make him perhaps over time, question staying on the board?

[Federal Reserve Expert 2]

So I think his decision is just bigger than that. This is really fundamentally gonna come down to his perception of the threat posed by President Trump on the Constitution. This is ultimately going to be about whether or not Trump ceases his attacks

[Federal Reserve Expert 1]

against the central bank and allows it

[Federal Reserve Expert 2]

to do its job or if he continues them. And if Trump decides to turn on Warsh or continues his attacks on other officials, all that's going to do is reaffirm. Exactly. And it's going to keep motivating Powell to stay on. And at this point, he's made the hard decision already to stay.

[Colby Smith]

Well, let me end with a question about Powell and his decision to stay on the board, because from what you're saying, even if Warsh ends up being an ideological fiscal ally, he's going to stay on anyway. And he's going to keep arguing the reason he's staying is to protect the Fed from politics. But by staying in a way that his predecessors for the last many decades have not, does he risk himself politicizing the Fed? Because staying on to fight the President is ultimately, whether you agree with it or not, a political decision. It might be a principal decision, but ultimately a political one. Is he making the Fed more political by doing this?

[Federal Reserve Expert 2]

I think that's exactly the criticism that Powell is opening himself up to, and I think he's aware of it. I mean, he was pressed at his final news conference about exactly this issue.

[Senate Questioner]

By remaining on the board, you're actually taking a political act and denying President Trump the majority of the board, which as president, he would have if you left.

[Jerome Powell]

I don't see that at all.

[Federal Reserve Expert 2]

And he really pushed back on that characterization.

[Jerome Powell]

I don't see how this will interfere. My intention is not to interfere. You know, I was a governor for almost six years. And the tradition is at the Fed that governors who understand how difficult the role of chair is, is. And as a, as a soon to be former chair, I do understand how hard it is to get consensus with 19.

[Federal Reserve Expert 2]

But the fact that the administration's actions are influencing his decision to stay or go really has kind of changed the nature of what previously was a very kind of mundane personnel process that occurred at the Fed.

[Jerome Powell]

You try to collaborate with the chair and try to support the chair when you can. When you can't, you can't. And I think that's the attitude that people generally take, and that's the attitude that I'll take.

[Federal Reserve Expert 2]

Now, suddenly that is going to cast on to other policymakers at the Fed who are thinking about leaving or staying. If you leave, does that mean that you are creating an opening for the President to put someone else in there that's going to lead the institution in the wrong direction.

[Colby Smith]

To sound a little bit like the Supreme Court.

[Federal Reserve Expert 1]

Exactly.

[Federal Reserve Expert 2]

And I think that the fact that, you know, people are gaming all of these things out just show the way in which that politics has infiltrated the central bank because of these attacks from the President right.

[Colby Smith]

There really isn't any going back from this.

[Federal Reserve Expert 2]

Exactly. It'll be interesting to see how Warsh kind of deals with that pushback if he eventually gets it from the president and ultimately like how much of a bulwark he himself is going to be in protecting his own independence to do his job well.

[Michael Barbaro]

Colby, thank you very much.

[Federal Reserve Expert 2]

Thanks so much for having me.

[Michael Barbaro]

We'll be right back.

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[Susan Lee]

I'm Susan Lee. I'm a researcher and fact checker with the Daily. What I do is make sure details in our episodes are accurate. For us, every single fact in an episode matters. The Daily is part of the New York Times. We do everything we can to make sure we get the facts right. Subscribers make it possible for us to do that. If you want to subscribe to the New York times, go to nytimes.com subscribe.

[Michael Barbaro]

Here's what else you need to know. Day On Wednesday, the U.S. senate blocked Democrats seventh attempt to halt the war in Iran and require congressional approval for it to continue. But a Republican defection signaled the party's growing impatience with President Trump over the war. For the first time, Republican Senator Lisa Murkowski of Alaska joined Republicans Susan Collins of Maine and Rand Paul of Kentucky in voting with Democrats. In the end, a Democratic senator, John Fetterman of Pennsylvania, crossed party lines to cast the decisive vote to block the

[Colby Smith]

measure,

[Michael Barbaro]

and South Carolina's Supreme Court has overturned the murder convictions against Alex Murdaugh, a lawyer found guilty guilty of murdering his wife and one of his sons in a 2023 trial that captivated the country. The court said that interference by a court clerk involved in the murder trial meant that Murdoch's conviction must be voided and a new trial be held. Jurors in the original trial said the clerk made prejudicial comments to them about Murdaugh, despite the rules ruling Murdoch will remain in prison because he pleaded guilty to different crimes, including stealing money from his law firm and his clients. Today's episode was produced by Mary Wilson, Lexi Diao, and Ricky Novetsky. It was edited by Mark George with help from Lisa Chow, and contains music by Marion Leslie, rowani Misto, Pat McCusker, and Dan Powell. Our theme music is by Wonderly. This episode was engineered by Alyssa Moxley. That's it for the Daily I'm Michael Balbaro. See you tomorrow.

[Senate Announcer]

This podcast is supported by the American Petroleum Institute. Energy demand is rising, and the infrastructure we build today will power generations to come. We can deliver affordable, reliable, and innovative energy solutions for all Americans, but we need to overhaul our broken permitting process to make that happen. It's time to modernize and build, because when America builds, America wins. Read API's plan to secure America's future at permitting reformnow.org.