In Episode 12 of Power and Consequences, we (Gary Gensler and Simon Johnson) discuss the major challenges facing Kevin Warsh as he becomes the new Chairman of the Board of Governors of the Federal System. (Mr. Warsh still needs to be sworn in, but this is expected to happen soon.)
When he steps into his new role, Mr. Warsh and the Federal Reserve will face a high dose of significant economic uncertainties: the Iran War supply shock; the Artificial Intelligence infrastructure investment demand shock; and continuing uncertainties related to tariffs, declining net migration, and the precise extent of fiscal stimulus from last year’s tax bill. Regarding AI, Mr. Warsh recently wrote that it may lower prices (or slow inflation) and could create the space for interest rate cuts. Former senior officials Jared Bernstein and Janet Yellen (both Democrats) caution that AI currently is driving an investment boom, tending (all other things being equal) to create inflationary pressure. The difficulties surrounding the reopening of the Strait of Hormuz also means that energy prices are likely to stay higher for longer.
Adding to these substantive economic debates, Mr. Warsh faces the challenge of maintaining Federal Reserve independence. Mr. Warsh may reasonably be considered to have been somewhat of a hawk historically, i.e., someone who puts relatively more weight on controlling inflation. But how will he square these views with the position, stated many times, by President Trump that interest rates – short-term and longer-term – should be significantly lower, and that the Fed Chair should make this happen?
Mr. Warsh also has expressed his share of criticisms of Fed policy in recent years. Though he supported extraordinary measures by the Federal Reserve in the immediate aftermath of the 2008 Financial Crisis, by 2010 then Governor Warsh was of the opinion that “expanding the Fed’s balance sheet is not a free option.” He supported strong action by the Fed in support of the economy when COVID arrived, but subsequently argued against the expansion of quantitative easing and spoke out in favor of tighter Fed policy in 2021-22.
The long-standing views of incoming Chairman Warsh on the Fed are clearly articulated in an April 2025 speech to the G30, available through the Hoover Institution. This includes the position that, "The Fed has acted more as a general-purpose agency of government than a narrow central bank."
Mr. Warsh is strongly not in favor of the current size of the Fed’s balance sheet and what this implies for the operation of monetary policy. As we discuss in the podcast, trimming the size of the Fed’s balance sheet, while it bears consideration, is likely to put upward pressure on long-term interest rates, the key benchmark for mortgages.
Shrinking the Fed’s balance sheet may also face resistance from other Fed Governors. For one such view, see this speech last week by Fed Governor Michael Barr. If this is not enough Fed speeches for you, try this speech by Chairman Jay Powell and this speech by Governor Christopher J. Waller!
We covered the basics of central banking in Episode Two: The Federal Reserve and Monetary Policy which includes an accompanying newsletter with links to reading that can help you dig deeper into particular issues.
In 2010, Simon and James Kwak published 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, arguing that deregulation played a key role in encouraging risk-taking and overleveraged bets placed by big banks in the run-up to the 2008 crisis. The subsequent Dodd-Frank financial reforms made the financial system safer on multiple dimensions. More recently, however, the Federal Reserve has proposed updated rules that might allow banks to carry more debt relative to loss-absorbing equity buffers. For more on this, see Simon’s testimony to the House Financial Services Committee in December 2025. (Simon is co-chair of the CFA Institute Systemic Risk Council, a group of former officials and financial market participants that focuses a great deal on the direction of regulation for big banks in the U.S.)
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We are happy to share additional content here on central banking, as suggested by Eileen Tipoe and her colleagues at Core Econ (Curriculum in Open-access Resources in Economics) a UK non-profit distributing educational/textbook materials for free. (Simon is on the board.)
· CORE Insight ‘Too big to fail’ explores the global financial crisis and subsequent reforms aimed to address the problems that arise when banks become too big to be allowed to fail.
· CORE Insight ‘Financing American government’ Sections 4-7 explain how the Federal Reserve conducts monetary policy; Sections 1-3 focus on the Treasury and government borrowing.
· The Economy 2.0, Unit 5.9: ‘Monetary policy and inflation targeting’ discusses central bank independence and why it is crucial for inflation targeting.
· The Economy 2.0, Unit 8: ‘Economic dynamics: Financial and environmental crises’ Sections 8.4-8.8 discuss the US housing price bubble; Sections 8.9-8.10 discuss financial system instability and the role of central banks.
