Kevin Warsh Says Jerome Powell Has Failed. Inside the Mind of the Man Who May Lead the Trump Fed.

The former Fed governor is among the top three contenders for the next chair. He spoke with Barron’s about rates, inflation, and more.

Kevin Warsh, former governor of the US Federal Reserve. (BARRY MORGENSTEIN)

Kevin Warsh likes to tell a story that explains why he would remake the Federal Reserve from top to bottom if President Donald Trump chooses him to be the central bank’s next chair. Trump will soon announce a replacement for current Chair Jerome Powell, and has named Warsh as one of his top candidates for the job.

The story goes back to 2006, when Warsh made history by becoming the youngest-ever Fed governor at 35. His age notwithstanding, he had an impeccable pedigree: Stanford University undergrad, a stint as Milton Friedman’s research assistant, Harvard Law, a rapid rise at Morgan Stanley, an appointment to the National Economic Council, and more. But all of that meant he was essentially overthinking monetary policy, he says now.

It took a meeting with the inflation-slaying giant of a former Fed chair, Paul Volcker, to straighten him out. “I asked him a series of arcane questions about the central bank and the fed-funds rate,” Warsh, 55, says in an interview.

Volcker stopped him. “He said to me, the job of the central bank is to do two things. It is, first, to get interest rates about right. And second—and he emphasized it was at least as important as the first—is to make sure you look like you know what you’re doing.”

“The Powell Fed has failed on both measures,” Warsh says.

Much like Trump, Warsh wants lower interest rates. But that isn’t accomplished by writing down a lower rate-predicting dot on the Fed’s next Summary of Economic Predictions. That would be only the first part of Volcker’s maxim.

Markets also need to see a Fed chair who looks like he knows what he’s doing—who has credibility, in Fed-speak. Warsh believes that the markets distrust the Powell Fed after a series of policy mistakes has left inflation running hot. The consumer price index grew at a 2.9% annual rate in August, well above the Fed’s 2% target, the Bureau of Labor Statistics reported in mid-September, just before the Fed cut interest rates by a quarter of a percentage point.

Created with Highcharts 9.0.1Inflation has plummeted, but is still higher than the Fed’s annual target rate of 2%.Source: Labor Department Note: consumer-price index

Created with Highcharts 9.0.1Fed’s target rate2021'22'23'24'25012345678910%

The next Fed chair can reset the institution’s credibility, in Warsh’s view, only by overhauling the way the Fed thinks about its relationship with the markets, the economy, and the rest of the government.

Warsh would chart a new course that de-emphasizes the inflationary impact of factors such as supply chains and tariffs in favor of a view of inflation driven by government spending and the money supply. And he would cease what he sees as the Fed’s political interference in the rest of the government’s actions.

All of that makes questions about where Warsh would set rates more or less moot, in his mind. Markets would react to the newly credible Warsh Fed by lowering interest rates on their own.

Warsh may not be the president’s ultimate pick to lead the Fed. But in the 14 years since he left the Fed, Warsh has become a leading intellectual force in the conservative movement to reform the central bank. That movement is eager to seize the moment as soon as Powell’s term ends on May 15, 2026. Its goal: Downsize the Fed to get it out of the way of the other parts of the government.

That would start with undoing Powell’s efforts since he became chair in 2018. “The Powell Fed has failed to get interest rates about right for most of the tenure of the Powell Fed,” Warsh says.

He ticks off a list of the Powell Fed’s perceived flaws: “Wrong track record, wrong operating framework, lack of curiosity, and lack of credibility.”

The Fed’s poor track record on interest rates goes back to 2018, when “they raised rates into a market meltdown, and I called them out for that,” he says.

In 2020, the Fed adopted a policy that would allow inflation to run above its 2% target to compensate for times when it ran below, as it had for years in the wake of the financial crisis. “They begged for higher prices,” Warsh says.

That orientation made the Fed late to acknowledge the danger of the post-Covid-pandemic inflation surge. The consumer price index peaked at an annual growth rate of 9.1% in June 2022.

“Then they blamed everyone else for it: Vladimir Putin, Covid,” Warsh says.

That continues to this day, he adds. “Even at the latest meeting, they said they find themselves in a very challenging position, as if they are victims. They are not victims of the state of prices. They are the cause of them.”

The Fed’s blunders have made the central bank effectively unable to control interest rates, Warsh says. “Markets, businesses, households, they remember the mistakes.”

He cites the bond market’s behavior following the Fed’s rate cuts from September to December 2024. Powell and other voting members of the Federal Open Market Committee lowered rates by half a percentage point in September 2024, a move Trump immediately denounced as an attempt to swing the election that year for his opponent**.** Quarter-point cuts followed in November and December.

But as the federal-funds rate fell, the yield on the 10-year Treasury note rose by more than a full percentage point from mid-September until it peaked at 4.8% in mid-January of this year.

The Fed controls very short-term rates via changes in the fed-funds rate. It can move those up and down more or less at will. It can influence the direction of longer rates, such as the yield on the 10-year Treasury note, but bond-market traders ultimately set those rates. The 10-year yield in turn sets the rates for mortgages, credit cards, and other consumer debt.

“The purpose of cutting rates is to cut rates,” Warsh said at the Grant’s Fall Conference, an event for investors, on Sept. 30. The Fed’s officials thought they had done so. “Well, they should ask everyone out there that was looking to get a mortgage. Thirty-year fixed-rate mortgages went up 100 basis points [one percentage point]. That is a sign of an institution that has mistaken its powers and influence.”

An alternative explanation for the rise in bond yields is that the market was ingesting new data in late 2024: Trump won the election in November, prompting traders and investors to assume that taxes probably would be cut. Lower taxes can drive growth, deficit spending, and inflation.

Similarly, Powell’s defenders argue that while the Fed may have waited too long to react to the Covid-era inflation spike, its actions ultimately resulted in a sharp fall in inflation. Warsh, in their view, is cherry-picking uncomfortable moments from the safety of his private-sector perch, where he doesn’t need to deal with the complexity of running a central bank in a rapidly evolving economy.

His criticisms of the dangers of inflation also appear to be at odds with his plan to lower rates, they say, while his plan to reduce the money supply simply won’t matter, since changes in how much the government prints don’t send clear signals about inflation.

The Federal Reserve didn’t respond to a request for comment.

Nonetheless, to Warsh, the Fed’s track record demands what he often calls “regime change.”

“We need to fundamentally rethink macro, which is a fundamental rethink of the core economic models that the Fed is using—rethink what is the core theory of inflation that the Fed is using, which I think is mistaken.”

The models that the Fed uses to interpret economic data are wrong, in Warsh’s view. “They believe that inflation is driven by consumers, by wages that are rising too much, and consumers that are spending too much,” Warsh says. “I fundamentally disagree. At the core, I think inflation comes about when the government spends too much and prints too much.”

Warsh wants to see a return of monetarism, a school of thought that holds that increases in the money supply can drive inflation. “That [idea] is sacrilege in the four walls of the Federal Reserve and sacrilege in the Harvard economics department,” he says.

Warsh would limit significant areas of the Fed’s authority, as well, such as banking supervision. He believes that the political agencies are better suited to manage that kind of regulation.

Nor would the Fed retain full discretion over some decisions regarding its now-$6.6 trillion balance sheet, in his view. The Fed began to buy up financial assets such as Treasuries, and later mortgage-backed securities, in the wake of the 2008-09 financial crisis to help the financial system create more credit while interest rates were already near zero. Warsh was on the Fed board at the time and said he supported that attempt as a kind of necessary evil. But now that the crisis is long past, the Fed should stop holding those assets.

That view isn’t especially heretical among some Fed watchers, given disagreements about the role the Fed’s balance sheet plays in the markets. But Warsh sees it as part of a greater plan to restore balance between the Fed and the elected parts of government.

He refers to the plan to reduce the balance sheet as part of an update to the 1951 Treasury-Fed Accord. That agreement cemented the Fed’s independence from the rest of the government. The accord left the Treasury in charge of government spending and taxation, or fiscal policy.

But the Fed’s large holdings now effectively overstep into the fiscal domain that is, or should be, the responsibility of elected officials, Warsh says. The Fed’s large holdings influence the market by arguably holding down some Treasury yields.

Warsh wants not just to reduce the size of the balance sheet—with due notice to markets to avoid disruption—but also to give Treasury Secretary Scott Bessent a large share of the responsibility for how and when that happens. “The Treasury secretary would need to find the proposed change in Fed holdings acceptable, given that it is partially fiscal policy in disguise,” Warsh says.

Warsh would turn off that part of what he refers to as the monetary “printing press.” By doing so, “you have created space to lower interest rates,” he says.

Warsh served on the Fed through the 2008-09 financial crisis and departed in 2011. He then took positions at Stanford. (His penchant for three-piece suits bucks Silicon Valley’s trend toward more casual business fashion.) He is married to Jane Lauder, a billionaire by virtue of her stake in the cosmetics company named for her grandmother, Estée Lauder.

But Warsh’s “real day job” is working for the legendary investor Stanley Druckenmiller. Warsh was hired in 2011 after Druckenmiller stopped taking outside investors’ money and set up the Duquesne Family Office to manage his “small nest egg,” in Warsh’s words. Warsh arrives early to Duquense’s Midtown Manhattan office, decorated with antique American flags, to put in a full day’s work helping Druckenmiller trade.

“We invest in every capital market in the world, in Asia, Europe, the U.S., and South America,” Warsh says. “And we exchange views; you know, we debate, should we be long or short the yen? Should we be long or short the pound? Should we be long or short U.S. Treasuries?”

Warsh declines to share his or Druckenmiller’s view of Treasuries or other positions.

Duquesne found success investing in early-stage private companies such as Palantir, now public. “[CEO] Alex Karp, Stan, and I have been through quite a lot together,” Warsh says, without elaborating.

He is also friendly since college with the investor Peter Thiel and venture capitalist Marc Andreessen, whom Warsh says put him and Druckenmiller into Bitcoin early. Duquesne remains active in crypto.

Over time, Warsh also became “dear friends,” he says, with Bessent, a fellow protégé of Druckenmiller’s who is now Trump’s Treasury secretary. The two talked regularly for years before Bessent took the job.

They remain close but now talk much less frequently, Warsh says.

But Bessent and Warsh had one important recent conversation: In September, Warsh says, “I met with Scott in a formal interview to be considered to be Fed chair.”

Trump considered Warsh for Fed chair during his first term, and has expressed regret that he ultimately went with Powell instead. He has said he is considering three people as his top choices now: National Economic Council Director Kevin Hassett, Fed governor Christopher Waller, and Warsh.

Bessent is formally charged with vetting the candidates, and has said he intends to hand a list of some three to five names to Trump soon.

The interview, Warsh says, “seemed like a normal discussion that Scott and I have had for the last 15 years.”

They talked about “the issues of the moment and the policy choices that the Federal Reserve and, more broadly, the U.S. government have made,” he says.

Bessent didn’t instruct Warsh where he wanted the Fed to set rates, and neither has Trump, Warsh said. But Trump has also said repeatedly in public that he wants the Fed to lower rates by as much as three percentage points. The current federal-funds rate target range is 4.00%-4.25%.

Trump’s interventions have made investors uneasy about the future of Fed independence, which is at the heart of the central bank’s inflation-fighting credibility. All living Fed chairs and a bipartisan group of Treasury secretaries recently signed on to a brief to the Supreme Court arguing that the president’s attempt to fire Fed governor Lisa Cook over alleged mortgage fraud was a dangerous risk to that independence.

Warsh dismisses that brief. “I did not know that senior economic officials’ at the Treasury and the Federal Reserve expertise went all the way to constitutional jurisprudence,” he says.

As for his views about the Fed lining up with the outcome the president wants, that is in large part because what the president wants is good for the economy, Warsh says.

“What you’re hearing from me is the views I’ve had for more than a dozen years. You and others can judge whether they’re convenient or inconvenient,” he says.

Write to Matt Peterson at matt.peterson@dowjones.com

Corrections & Amplifications: The 1951 Treasury-Federal Reserve Accord gave fiscal policy to the Treasury and monetary policy to the Fed. An earlier version of this article reversed those roles. In addition, an amicus brief to the Supreme Court in September was signed by all living former Fed chairs, not governors, as originally written.