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Fed Nominees Pressed on Political Ties
Questions Raised Over Their Service in Administration, but Confirmation Is Likely

By Nell Henderson
Washington Post Staff Writer
Wednesday, February 15, 2006

President Bush's decision to elevate three former administration economic advisers to the Federal Reserve Board prompted questions yesterday about whether they would be able to steer the economy independently of the White House they have served.

Bush's most recent Fed nominees, Randall S. Kroszner and Kevin M. Warsh, would join Ben S. Bernanke, who became chairman of the Fed earlier this month after serving for six months as chairman of Bush's Council of Economic Advisers. Bernanke is scheduled to testify today before the House Financial Services Committee in his first public appearance on Capitol Hill as Fed chief.

If Kroszner and Warsh are confirmed by the Senate, it will mark the first time in many years that three of the seven Fed board members will have recently served in the White House that appointed them, said Thomas Schlesinger, executive director of the Financial Markets Center, a nonprofit group that monitors the Fed.

"This is inevitably going to create the impression that the board is more political than in the past," Schlesinger said. "This creates more of a burden on Bernanke and company to prove they're not taking their cues from [White House Deputy Chief of Staff] Karl Rove."

In past decades, White House officials and members of Congress have pressured Fed officials to keep interest rates low, which is politically popular. But Fed officials are supposed to keep inflation low, which sometimes requires raising interest rates. The Fed also regulates some banks and financial institutions, which can stir up opposition from affected interest groups.

Kroszner, 43, a professor of economics at the University of Chicago's business school, was a CEA member from 2001 to 2003. Warsh, 35, who has served on Bush's National Economic Council for the past four years, is a special assistant to the president for economic policy.

Sen. Paul S. Sarbanes (Md.), the ranking Democrat on the Senate Banking Committee, pressed Kroszner and Warsh during their confirmation hearing yesterday on whether they would be able to act independently of outside political pressures.

Both men promised that they would.

"The independence of the Federal Reserve is fundamental to its mission," Kroszner told the committee. "The central bank cannot be a political animal. It must be an independent animal."

Warsh, who worked on Wall Street before joining the Bush administration, said it is "essential for [financial] markets to believe the judgments" of Fed officials are politically impartial. He said he knew he'd be "taking off one hat and putting on another."

Bush's nominee to become CEA chairman, Edward P. Lazear, 57, also promised at the hearing that he would see it as his duty to "inform policymakers in an unbiased and professional manner." Lazear, a professor at Stanford University and a senior fellow at the Hoover Institution, served last year on Bush's advisory commission on tax reform.

Bush has appointed the four other members of the Fed board -- two Republicans, a Democrat and a political independent. The presidents of the 12 regional Fed banks are chosen by their boards of directors and include members of both parties.

Bernanke, 52, a former Princeton University economics professor, served on the Fed board for more than two years before joining the White House. He was renowned during his academic career for his work on monetary policy, the central bank's efforts to influence the economy through controlling the money supply, chiefly by adjusting interest rates.

Kroszner has published research on banking and financial regulation, international banking, financial crises and monetary economics.

Warsh is a lawyer who has worked for Morgan Stanley as an investment banker and as an adviser on mergers and acquisitions.

Some critics have questioned Warsh's credentials for the Fed job.

"There are plenty of people with better résumés to fill the responsibilities of a Fed governor," said Lee Price, research director at the Economic Policy Institute, citing Warsh's lack of experience with banking regulation and monetary policy.

However, Warsh's confirmation appeared assured yesterday when he was warmly endorsed during the hearing by Sen. Charles E. Schumer (D-N.Y.).

Moreover, Senate Banking Committee Chairman Richard C. Shelby (R-Ala.) supports the nominations and plans to move toward holding a committee vote as soon as possible, said committee spokesman Andrew S. Gray.

Shelby "believes that all the nominees performed well in the hearing and demonstrated an ability to engage the many issues they would encounter in their new positions," Gray said.

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