Warsh Games

“Are you going to be the president’s human sock puppet?”

That was Senator John Kennedy, the Louisiana Republican who talks like a small-town lawyer and punches like one, too. He lobbed that grenade at Kevin Warsh on Tuesday, during Warsh’s Senate Banking Committee confirmation hearing to become the next Chairman of the Federal Reserve.

Warsh’s answer: “Senator, absolutely not.”

Welcome to yet another DC circus, dear reader.

Trump picked Warsh because he wants rate cuts. Warsh convinced Trump he broadly shares that view. The current effective federal funds rate sits near 3.64%, and Trump has said in public that he’d be “disappointed” if Warsh doesn’t move quickly to cut once confirmed.

So Warsh strode into that hearing with a very narrow path to walk. He had to channel his inner Paul Volcker to sound serious on inflation. He had to avoid sounding like Arthur Burns to prove he’d act independently of the White House. But, perhaps like Alan Greenspan, he couldn’t sound so independent that the man who nominated him pulls the rug.

He mostly pulled it off. Mostly.

The Independence Two-Step

Warsh’s opening statement told you everything about how he plans to handle Trump. He called central bank independence “essential.” Then he defined independence in a way that quietly lets Trump off the hook.

“I do not believe the operational independence of monetary policy is particularly threatened when elected officials — presidents, senators, or House members — express their opinions on interest rates.”

Read that again. It’s a permission slip. Trump can jawbone the Fed all day long, and by Warsh’s definition, that’s fine. Independence, in Warsh’s telling, is “self-enforced.” The Fed protects itself by acting well. What politicians say from the sidelines doesn’t matter. And if the Fed actually performed that well, he’d be correct.

Nevertheless, it’s clever. It lets Warsh keep his job prospects alive without saying anything he’d have to eat later.

He also threw a bone to the inflation hawks. He pointed out that inflation has picked up again. He said the Fed’s job is to “act in the nation’s interest.” He even took a shot at the current Fed: “The Fed’s struggle to bring inflation back to 2% reflects policy errors in 2021 and 2022, when the Fed was too slow to raise interest rates as inflation began to rise.”

Amen to that!

Between the lines, Warsh is stating, “Powell blew it on the way up. I won’t blow it on the way down.”

Fauxcahontas Strikes Again!

The insufferable Senator from the great state of Taxachusetts, Elizabeth “1/1,024th” Warren, came in chucking haymakers at windmills. She asked Warsh who won the 2020 election.

Warsh gave the safest answer you can give: “Congress certified the 2020 election.” Not “Biden won.” Not “Trump lost.” Just a procedural fact. Nobody can yell at him for saying it, and nobody can use it against him later.

Warren also previewed the Democratic line of attack for the full floor vote. Without the slightest hint of self-awareness, Warren said Warsh is “uniquely ill-suited” for the job. Her case: he has a nine-figure personal portfolio with positions he won’t fully disclose, and he got the nomination by telling Trump what Trump wanted to hear on rates. Apparently, having only an eight-figure net worth brings out the cattiness in Warren.

However, I must give Warren some credit. On the money question, the Office of Government Ethics has given Warsh a provisional pass. He’s agreed to sell a few dozen holdings if confirmed, but some of those are allegedly tied to Jeffrey Epstein. My question is this: why on Earth does he hold those assets now? And why is everyone in DC seemingly somehow connected to Epstein?

The Tillis Swerve

Here’s the one that actually matters for the whip count.

Senator Thom Tillis of North Carolina, a Republican, says he’s currently a “no.” Not because of Warsh. Because of the Justice Department’s “frivolous” ongoing investigation of Jerome Powell over Fed building renovations. Tillis called the probe “bogus” and said, “Let’s get rid of this investigation so I can support the confirmation.”

That’s not a policy position. That’s a hostage note. Tillis is using his vote to pressure the DOJ to drop the Powell case. If the White House wants Warsh confirmed quickly, someone has to cut a deal.

Fed watchers still expect Warsh to clear the committee and the full Senate. But Tillis can drag the timeline out for weeks. And every week of delay is a week of market uncertainty about who’s running the Fed.

Wrap Up

Here’s the takeaway for your portfolio.

Warsh is not going to walk in and cut 100 basis points on Day 1. Trump wants him to. The hearing made clear he’s not promising it. He kept repeating that the Fed must act “in the nation’s interest” and that “inflation is a choice, and the Fed must take responsibility for it.”

That’s hawkish language dressed up for a dovish president.

So the market’s assumption that Warsh means fast, deep cuts is probably wrong. He’ll cut, eventually. But he’ll cut slower than Trump wants, and he’ll talk tough about inflation the whole time. That’s the only way he keeps the job and keeps the Fed’s credibility.

For gold and miners, that’s still good. Any cuts from the 3.5-3.75% band are tailwinds, even slow ones. For the dollar, it’s mixed. A cautious Warsh means less downside for the greenback than a Warsh who slashes on arrival.

And for bonds? Watch the long end. If the market starts pricing Warsh as a fast cutter, long rates may actually rise on inflation fears. That’s the opposite of what Trump wants. It’s also the scenario where Warsh’s “I’m not a sock puppet” routine gets its real test.

Senator Kennedy’s sock puppet line was a gift. It let Warsh deny the charge in public, on the record, and move on.

But Trump was watching, too. And Trump remembers.