Kevin Warsh, nominee for chair of the Federal Reserve, signaled that there would be "fundamental" changes to be made if he's confirmed to take the position, including a smaller central bank balance sheet and a different way of approaching inflation.

Warsh is a financier and former member of the Fed's board of governors. He was nominated in January by US President Donald Trump to replace Jerome Powell, the current Fed chair.

During the two-hour hearing conducted by the Senate Banking Committee on Tuesday morning, Warsh said the Fed should rely primarily on interest rates rather than its $6.7 trillion balance sheet to achieve its policy goals.

"At least as important, it should not be holding long-term Treasury assets as if it's the fiscal authority," he said, referring to $3.6 trillion worth of US notes and bonds — debt that matures in over a year.

Warsh emphasized that the change would be slow to give markets time to adjust to a reduced Fed demand for Treasuries.

"That kind of regime change would have to be deliberate, well-orchestrated, well-choreographed and well-described, so that unnecessary upsets are not done to financial markets as we go to a policy regime change much more focused on interest rates," he said.

He said that an interest rate tool is fairer and hits the entire economy, while the balance sheet tool "disproportionally helps those with financial assets."
Warsh said the high inflation rates in recent years were due to problems from a "fatal policy error going back four, five years" and "a legacy that we are still dealing with."

"We need fundamental policy reform to fix it," he said. "That means a regime change in the conduct of policy. That means a different new inflation framework."

Warsh said he believes interest rates should be "forward-looking," based on good data.

"Too many Fed officials, past and present, opine in advance about where they think interest rates should be next meeting, next quarter or next year. I think that's quite unhelpful," Warsh said.

He also answered questions about AI, saying that "considerable work needs to be done," and decisions should be data driven.

"We don't know the state of AI. We can't be certain about the state of geopolitics. The economy is going to change. You need central bankers that are humble, that are nimble, that are open-minded, that can react when we have good data, when events strike us."

Some senators questioned his independence from Trump, and Warsh said he would not lower interest rates or make any other policy maneuvers as a direct result of political pressure from Trump.

"The president never once asked me to commit to any particular interest rate decision, period, and nor would I ever agree to do so if he had, but he never did," said Warsh, replying to Republican Senator John Kennedy.

He said Trump's desire for much lower interest rates "sounded very similar to me, to every other president in economic history that I've studied," adding that leaders generally have a strong preference for lower rates.