By Howard Schneider
WASHINGTON, Nov 4 (Reuters) – Democrats’ sweeping midterm victory strengthens the Federal Reserve against President Donald Trump’s efforts to meddle with it, with the Senate’s control over appointments a major guardrail against Trump landing any more allies at the central bank.
It could also mean new headaches for Chairman Kevin Warsh, given key oversight committees will be in the hands of Democrats. The Senate Banking Committee’s new chair will likely be Democratic Senator Elizabeth Warren of Massachusetts, a harsh Warsh critic, replacing Trump ally and Warsh supporter Tim Scott of South Carolina.
Warsh “got no support for his chairmanship from Democrats… Hostile questioning could put Warsh’s rhetoric to the test,” as he pursues a quieter and less publicly transparent form of central banking, economists from Monetary Policy Analytics, the firm of former Fed Governor Larry Meyer, wrote about the Democratic Senate win.
JPMorgan economist Michael Feroli said that the change in Senate leadership even has important implications for how long Warsh might helm the Fed.
Noting that Warsh’s term ends in 2030, he told clients that the election result “increased the odds his term will end with Democratic control of the Senate.”
To secure another term, as his most recent predecessors did, “Warsh will need to spend less time looking out the window and more time walking the halls of Congress,” working to win over legislators, Feroli said.
In May, Warsh was confirmed as chair in a polarized 54 to 45 vote, with only one Democratic senator supporting him.
Democrats, having campaigned heavily on cost-of-living issues, have incentive to push Warsh on the central bank’s inflation mandate. The Senate panel will have broad room to investigate issues such as, in Warren’s case, Warsh’s opaque disposition of hundreds of millions of dollars in assets as he ascended to the Fed’s top job.
For Trump, the new dynamics on Capitol Hill directly stymie his effort to put more allies on the Fed’s seven-member board, three of whom were appointed by former President Joe Biden. Former Chair Jerome Powell, appointed to consecutive terms by Trump and Biden but now at odds with the president, remains on the board as well.
The president has called the configuration “hostile” and “partisan,” and argued the Fed needs to drastically cut interest rates that policymakers — including Warsh — have instead been raising to control high inflation.
Trump’s effort to fire Governor Lisa Cook remains ongoing, with a White House administrative procedure expected in coming weeks to set the stage for a Trump announcement that he has “cause” to fire her over errors on mortgage applications that predate her appointment to the Fed.
A court challenge is likely to follow. The Supreme Court has ruled against Trump once already on the effort to oust Cook, and there is little prospect he would get a chosen replacement confirmed by a Democrat-led Senate if he were ultimately successful in removing her.
Even a Republican-controlled body rejected what were seen as extreme Fed appointments during Trump’s first term. Earlier this year, Republican Senator Thom Tillis, who decided not to run for reelection in North Carolina after Trump threatened him in a race won by Democrat Roy Cooper on Tuesday, held up Warsh’s nomination until the administration abandoned a criminal investigation of Powell.
A Senate under Democratic control “would change the confirmation environment for future Trump nominees…and could provide the Fed with a different degree of political support,” Mark Spindel, a partner at Pilot Wave Holdings and author of a book about Fed politics, wrote in an analysis of the election’s implications.
Fed independence “has always depended in part on Congress, and institutional support from the Senate can affect how much room policymakers have to make decisions based on inflation and employment rather than political pressures,” he wrote.
Democratic control of the Senate committee as well as the House Financial Services Committee could also complicate the bank’s regulatory reforms, which are being pushed by the Trump administration and by current Fed Vice Chair for Supervision Michelle Bowman. Among them, the Fed is drafting rules over the Genius Act regulating stablecoins, and it has rolled out a consolidation of the Fed’s bank supervision system.
(Reporting by Howard Schneider and Michael S. Derby; Editing by Dan Burns, Andrea Ricci and Jonathan Spicer )
