The Daily - A New Leader — and a New Showdown — at the Fed

Episode Date: May 14, 2026

After a year of harassing and threatening Jerome Powell, the chairman of the Federal Reserve, President Trump replaced him on Wednesday. Colby Smith, who covers the Fed, explains how the president ended one standoff only to create a new one. Guest: Colby Smith, a New York Times reporter covering the Federal Reserve and the U.S. economy. Background reading:  The Senate confirmed Kevin Warsh as the new chair of the Federal Reserve. Video: How Jerome Powell managed a chaotic era. Photo: Kenny Holston/The New York Times, Caroline Gutman for The New York Times For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday.  Subscribe today at nytimes.com/podcasts or on Apple Podcasts and Spotify. You can also subscribe via your favorite podcast app here https://www.nytimes.com/activate-access/audio?source=podcatcher. For more podcasts and narrated articles, download The New York Times app at nytimes.com/app. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

From the New York Times, I'm Michael Bolbaro. This is a daily. On Wednesday afternoon, after a year of harassing and threatening, the chairman of the most powerful financial institution in the country, President Trump finally replaced it. Sort of. Today, Colby Smith, on how the president ended one standoff at the Federal Reserve, only to create a new one.

It's Thursday, May 14th. The eyes are 54, the nays are 45. The nomination is confirmed. The president would be immediately notified of the Senate's action. The Senate is confirming Kevin Warsh as the next chair of the Federal Reserve. The move puts President Trump's pick in charge of interest rate policy during a time of high prices and economic uncertainty. Colby, we find. We find ourselves in a very curious place.

Just a few hours ago, the U.S. Senate confirmed President Trump's choice to replace Jerome Powell as chairman of the Federal Reserve, Powell whom the president has hated with the heat of a thousand sons. And yet, Powell is refusing to entirely cede the stage, even though he's no longer going to be chairman of the Fed. he's made this very surprising decision to stay on at the Fed not retire, and it's created this totally unusual scenario, old and new Fed chairs trying to somehow coexist inside the central bank in what is quite likely going to be a very messy situation. So talk us through the events that got us to this moment over the past few weeks. So it's a really complicated moment,

for the Federal Reserve. Jerome Powell's decision to stay on at the Fed breaks with really decades of tradition. The last time this happened was in the late 1940s, and that was at the request of the president at the time, Harry Truman. So this is obviously a very different situation. As you said, Trump and Powell, they've been at loggerheads for most of Trump's second term. And I can't remember a time in history in which a Fed chair stayed on past the end of his tenure when

the president explicitly didn't want him to. Mm-hmm. We have a fool at the Federal Reserve. He's an absolute fool. And this whole decision stemmed from an extraordinary pressure campaign launched by President Trump against Powell and the Fed for Powell's refusal to lower interest rates. Now we have a man that just refuses to lower the Fed rate,

just refuses to do it. And he's not a smart person. No, he's something wrong with him. It's just sweet. I'd be honest, I'd love to fire his ass. He should be fine. Guy's grossly incompetent. And it really took on a whole life of its own.

President Trump's long simmering war against Jay Powell, the Federal Reserve Chair, it has officially gone nuclear. One of President Trump's top targets, the chairman of the Federal Reserve, is now under criminal investigation. The investigation involves Powell's testimony into the cost of building renovations at the Fed. And it culminated in this criminal investigation launched by the Justice Department against Powell and the Fed over these renovations of its headquarters in Washington. And this, in a lot of ways, just ended up backfiring spectacularly against Trump. It looks fishing.

Right. This doesn't look great. If you wanted to design a system to cause interest rates to go up and not do. down, you would have the Federal Reserve of the United States and the executive branch of the United States get into a pissing contest. I hope they have a smoking gun or something, because I don't think you trifle with the Federal Reserve with the central bank. Because the existence of this investigation ended up becoming a big impediment to Trump

getting exactly what he's wanted for a long time, which is Powell to leave, and for him to be able to put in a new person as Fed chair. Right. And Trump has, by this point, picked this person he wants to be his new Fed chair, Kevin Warsh, whom Trump nominated as this investigation drama

is playing out. Exactly. Until the investigation is resolved, I cannot and I will not vote to support anyone on the Federal Reserve in my remaining tenure in the U.S. Senate. And what happened here

is that Tom Tillis, a retiring Republican senator from North Carolina, said he would not support any of Trump's Fed nominees until the legal threats into Powell had ended. The problem that I have here is that we had some U.S. attorney with a dream or assistant U.S. attorney thinking it would be cute to bring Chair Powell under an investigation just a few months

before the position was going to be open. And this was a really potent tool because Tillis had a pivotal vote on the same. Senate Banking Committee, which oversees the confirmation process for Fed nominees. He literally could block Trump's pick to replace Powell. Exactly. Just given the slim majority that Republicans have, his opposition to allowing the confirmation process to proceed created this blockade of sorts that put on pause something that Trump

had really, really wanted. Until the matter is solved, I'm a no. And I think what's important to remember about this. this is that the grounds of the investigation were so spurious. It was about this renovations project that had gone millions of dollars over budget, but cost overruns, they're not a crime. And I think it was clear from the very get-go that this investigation was really politically charged. This unprecedented action should be seen in the broader context of the administration's threats and ongoing pressure. Powell says as much in this extraordinary statement shortly after the

investigation went public. We talked about it the last time I was on the show. Right. This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions or whether instead monetary policy will be directed by political pressure or intimidation. And a short while later, we had a federal judge also coming out strongly against the investigation. This judge basically said in no uncertain terms that this was about pressuring and harassing Powell so the president could install someone who's more amenable to his demands. So you had all of this opposition mounting to this investigation, and it was quite clear it was on really shaky legal footing. So the question all along was, when would Trump blink?

How long would they continue to pursue an investigation that really had no future, especially when it was jeopardizing this thing that Trump had long wanted? Right. Suddenly, Trump was being asked to choose between revenge against the Fed chair he hates and replacing that Fed chair he hates. And in this period you're describing, he was kind of choosing revenge over replacement. Absolutely. And there was a time element here.

Powell's term was up May 15th. And they were running out of time to get Trump's nominee, Kevin Warsh, into that role. So we're all waiting to figure out how they're going to proceed here. And we keep getting signs that they're nowhere close to dropping

this investigation. The chairman says, no, no, you're attacking the independence of the Federal Reserve. That's not what we're doing. We're doing our job. U.S. Attorney for the District of Columbia, Janine Piro, who launched this investigation, continues to say she's pursuing this investigation. Federal prosecutors made an unannounced visit to the Federal Reserve yesterday as part of their investigation into Fed Chair Jerome Powell. What's the latest on that? Yeah, this was highly unusual. Members of her team at one point went to the Fed itself to try to visit the active construction site and poke around a little bit. There was just a lot of mixed messages at this point, and it started to impact, I think, how Powell began to speak about what he was going to do at the Fed. I have no intention of leaving the board until the investigation is well and truly over with transparency and finality.

On the question of whether I will then continue to serve as a governor after my term ends and after the investigation, investigation is over. I have not made that decision yet. So Powell has one tool of leverage left in his arsenal. His term as chair ends May 15th, but technically he can stay on as a member of the Fed's board of governors. This is a seven-person board who makes really important decisions about interest rates and policy and internal staffing decisions at the Fed. So it's an important position. And Powell had been really vague about what he planned to do. The Justice Department is calling off one of its most controversial investigations.

Janine Piro says she's dropping her investigation, looking at J. Powell and the Federal Reserve construction. And finally, on April 24th, so just a couple weeks before the end of Powell's term, Piro finally caves and announces that she's dropping the case. U.S. attorney, Janine Piro, added, I will not hesitate to restart a criminal investigation And should the facts warrant doing so? She keeps open the option of starting it again at any point. But she essentially says that she's wrapping up her investigation.

She kind of hands off the job to the inspector general at the Fed. I am prepared to move on with the confirmation of Mr. Warsh. I think he's going to be a great Fed chair. And that outcome was sufficient for Tillis to end his blockade. against Trump's Fed nominee, Kevin Warsh, but it wasn't enough for Powell. I welcomed the announcement last Friday by the U.S. Attorney for the District of Columbia that she had closed the criminal investigation. She also noted, however, that she would not hesitate to restart the investigation. At the end of April, in his last press conferences chair,

Powell makes clear he is not convinced whatsoever that the administration's investigation is over. My decisions on these matters will continue to be guided entirely by what I believe is in the best interest of the institution and the people we serve. After my term as chair ends on May 15, I will continue to serve as a governor for a period of time to be determined. And because of that, he is using his one tool of leverage. He's going to stay on at the Fed. You know, I'm literally staying because of the actions that have been taken. I had long planned to be retiring. And, you know, the things that have happened in really in the last three months of, I think, left me no choice but to stay until I see them through at least that long. So that threshold,

for Powell in terms of the investigation being well and truly over with transparency and finality, that's definitely not reached. But the bigger reason he says is that Trump's ongoing attacks on the institution have imperiled the Fed in a pivotal way. I worry that these attacks are battering the institution and putting at risk the thing that really matters to the public, which is the ability to conduct monetary policy without taking into consideration political factors. It is so important for our economy, for the people that we serve, that they can depend over time on a central bank that operates that way free of political influence. It has risked the Fed becoming more politicized, and it has risked the U.S. economy being undermined.

For him, it's not just about him and his future and the investigation. It's about the future of the central bank and its ability to operate free of political meddling. And how does staying on the Fed's board of governors, but not leading it, in Powell's mind, ensure that the Fed remains independent and can withstand these attacks from the president? So at the most basic level, by staying on Powell blocks Trump's ability to nominate another person to the Fed's board of governors. Now, this is important because the more people on the board of governors who are willing to do the president's bidding, the more likely it is that the institution becomes an extension of the administration. Now, Trump, of course, had the ability to name a new Fed chair in replacing Powell. But with Powell staying on, Trump would no longer be able to add another governor. And so what it effectively did was reduce Trump's influence over the board. And it's really important to underscore that the Board of Governors is really powerful. These policymakers are absolutely pivotal in the direction of interest rates, in the direction of bank regulatory policy, in staffing changes inside the Fed, and also as it relates to the regional bank presidents that sit across the country.

So they play a really crucial role in shape. how the Fed operates. So having a majority of supporters on the board can really sway the institution one way or the other. Because Powell linked his decision to stay on the board to the investigation into the Fed, I guess I have to ask, does a remaining in any way protect him

from that investigation being reopened legally? So from a legal standpoint, staying on doesn't really change much in terms of the investigation and his ability to be the subject of any kind of criminal probe on the margins. He is conferred benefits and protection by being a sitting governor. A president can't just remove him at will. So that stands in his favor. But what staying on really shows is that this is bigger than the investigation itself. He really believes this is about the institution, and the stakes are simply too high for him to leave.

Mm-hmm. So given that, the reality that sticking around on the board doesn't really offer much of a legal shield for Powell, it seems we're pretty much taking him at his word here that he wants to stay on to more broadly protect the Fed from Trump's encroachments and keep the Fed looking like basically Jerome Powell's version of the Fed. Right.

And I think there's going to be this tension right from the get-go where you basically have Powell stepping down his chair, moving his offices inside the feds building a couple offices down from his old one, this new guy coming in, Kevin Warsh, and people really don't know how it's going to work. Powell has said he's going to keep a low profile as a governor, but people are going to pay attention to him when he speaks up either inside the room ahead of rate decisions, or if he ever makes a speech publicly.

It has all the makings of an incredibly awkward environment where I think people are not really going to understand who is in charge at this crucial moment for the central bank. And I think what adds to the awkwardness here is that the person replacing Powell, Kevin Warsh, is a huge critic of him and everything he's done in his tenure as chair. And he has gone so far as to call for regime change. And the question on everyone's minds is how far is he going to push it? We'll be right back. So, Colby, tell us about Kevin Warsh, this incoming Fed chair and the basis for his critique of Powell and Powell's Fed.

So this is a bit of a homecoming for Warsh. He served as a governor at the Fed between 2006 and 2011, and this overlapped with the height of the global financial crisis, and he was pivotal in crafting the Fed's response to that moment. And that's where really the source of his criticism against the central bank started to brew. During this period. During this period. He ended up leaving in 2011 over a disagreement about how interventionist the Fed had become in financial markets and in the global economy because of its response to the financial crisis. What specifically was his criticism of the Fed's intervention starting after the financial crisis if he himself was highly involved in it? So if you think back to the 2008 crisis, banks weren't lending, you had bank failures, it was kind of a full stop on the economy.

So the Fed, they did two things. First, they drove interest rates down to zero, but that wasn't enough to stabilize things. So they did something else highly unusual at the time. They started buying up huge quantities of government bonds and mortgage-backed securities. that increased their portfolio of holdings, otherwise known as the balance sheet. And Warsh, he was on board for this initial response, but from his perspective, the Fed eventually took it too far. And I think it's important to look at the numbers here because before the 2008 financial crisis, the Fed's balance sheet was less than a trillion. And by the end of the crisis, it was over $4 trillion. Wow. So $4.X.

Exactly. And it got even bigger. And this is the crux of his criticism about the Fed as it stands today. After the pandemic, the balance sheet peaked at close to $9 trillion. It's now somewhere around $6.5 trillion. And for Warsh, the balance sheet, it's really emblematic of everything that has gone wrong at the central bank since he left it. The Fed balance sheet has played a particularly, I think, unhelpful role in... In his recent Senate confirmation hearing, he says that the Fed balance sheet has played a particularly, I think, unhelpful role in... In his recent Senate confirmation hearing, he says that the...

there are several reasons why this tool is problematic. First and foremost, he makes the case that expanding the balance sheet is actually bad for the U.S. economy. He says it exacerbates inequality. The Fed has an interest rate tool and a balance sheet tool. My view is the interest rate tool gets in the cracks. It's fairer. The balance sheet tool disproportionately helps those with financial assets. The interest rate tool hits the entire economy.

And he also warns that it risks making inflation worse. Had the balance sheet not been brought from the $800 billion level when I showed up at the Fed in 2006 to an order of magnitude higher, I think interest rates could be lower, inflation could be better, and the economy could be stronger. But his critique, it goes beyond economics. The big balance sheet has become an ordinary recurring force, and I think has been quite unhelpful. And it's part of the reason why the Fed is in the business of politics. He also thinks that when the Fed does this kind of stimulus, it creeps outside of its congressional mandate. And he says that when the Fed does this, it potentially threatens the Fed's credibility and its independence. We're going to have to find out a way in which we can take the balance sheet and make it smaller because a large balance sheet where the Fed owns more outstanding debt than many parts of the financial markets.

That's fiscal policy in disguise. Fed needs to get out of the fiscal business, focus on the monetary business, so the Fed can deliver on the remit you gave us. So when Warsh talks about regime change, a big part of what he means by that is redefining how the Fed should operate in the economy and the global financial system. What he's trying to do here is to minimize, I think, how interventionist the Fed really is in a lot of ways. and for him that would not only reduce the degree of economic harm caused by the central bank, but it would also rein in this mission creep that he sees as a threat to the Fed's institutional credibility. Simple question. Is worse right? And let me get even more specific. Is he right about inflation? We are living through still a rather inflationary era in American financial life. So is he correct that the Fed played a role in creating that?

So I think it's a complicated answer, unfortunately, because there were a lot of reasons to explain the high inflation environment that we're in today. So for Warsh, he has in hand a very clear example of how the Fed's overreach has created inflation and caused distortion in financial markets. And he points to the pandemic in 2020. The Fed steps in forcefully. It lowers rates to zero. It starts buying unlimited government bonds. And the response eclipsed anything that we. saw during the 2008 global financial crisis. And for Warsh, the problem was that the Fed kind of

continued this extraordinary support for too long. And even some officials at the Fed have kind of come around to this idea that they could have stopped buying bonds earlier. And I think that is because this episode created the worst inflation that we had seen in four decades. And that all happened under Powell's watch. For supporters of Powell, there are other things that you can point to to explain this inflation situation. Such as, because we covered it, President Biden's large stimulus, who wrote checks to Americans during the pandemic. Exactly.

There was an exorbitant amount of support provided to Americans at a time, and this is perhaps most important, that supply chains were shuttered. So you had all of this demand with constrained supply, and this mismatch created higher prices. Higher prices. And so this became the kind of. of opening, I think, for critics against Powell on the Fed to say that he had led the institution astray. And what about Warsh's kind of secondary critique here, which is that through these huge interventions,

Powell's Fed has overstepped its role in a way that's just bad for everybody? Is that view widely held? So it's an argument that has definitely gained traction. We've heard something similar from Treasury Secretary Scott Besson, specifically as it relates to the balance sheet and some of the interventions into financial markets that the Fed did back in 2020. But I'm not really sure it carries much weight inside the central bank. They argue that this balance sheet tool was absolutely crucial to getting the financial system functioning again and ensuring the economic recovery in the aftermath of the crisis. So that's Warsh's broad critique

of Powell's Fed. It obviously appeals, as you said, to Trump. But how does Warsh's view of the Fed line up with Trump's determination to cut interest rates? There's an assumption out there that Trump would never replace Powell with anyone who wasn't going to cut the interest rate because that's in such a singular way what Trump wanted and Powell refused to deliver. So, we're going to, What is Warsh saying about that? So what's really interesting about Warsh is that his whole history is someone who's been highly skeptical of lower rates. And he's someone who was kind of branded as this inflation hawk. Someone who was incredibly worried about price pressures in the economy and always wanted the Fed to keep in mind the risks of higher inflation.

And what that typically resulted in is him pushing back on the need for the Fed to cut interest rates more than anything else. else. And that's something that he had been consistent on, basically up until the point that he started to be considered to become Powell's replacement. And then what happened? And then we start to see a shift in tone from him. He comes up with all these different reasons why interest rates should be lower. And this marked a real flip-flop given his past stance. And it started to raise these questions among people who watched the Fed closely about what was behind this seeming flip-flop from Warsh. People started to ask whether this was politically motivated, and perhaps this was why Trump chose him to be his nominee to replace Powell. Right. How much does Powell remaining

on the board of governors, to bring us back to the first part of our conversation, how much harder is that going to make it for Warsh to cut interest rates if he wants to, in fact, do that in the coming months or years? I think actually it's not necessarily so much about Powell staying here, but the economic environment completely shifting against the need for cuts in the last couple of months. So Powell's presence in and of itself certainly does not help because he is someone who does not see an urgent need for the Fed to lower interest rates. And this is someone who obviously is respected across the committee, so his views on that matter. But cutting rates at this time would be economically disastrous, according to most officials at the Fed. They see inflation risks rising

because of this war. We have no idea when that's going to end. Oil prices are higher, and this is not an environment where lower interest rates are going to help whatsoever. If anything, it's going to make things worse. And so this puts worse in an incredibly uncomfortable position. His first meeting as chair is going to be in June, and no one expects him to be able to push him. through interest rate cuts at that moment. People don't even actually know if he is going to pursue that because doing so would undermine his credibility so directly. Because the economic environment does not call for cuts, him supporting that would look like he was

the president's policy lapdog. Exactly. And he spent his entire confirmation hearing basically trying to disabuse lawmakers of the notion that he was going to operate as Trump's sock puppet. This is this big credibility issue that's going to loom large over him. And he's going to be faced with this choice come that first meeting. Does he establish his own credibility and risk angering the president? Or does he do what the president wants him to do?

And then internally, his own credibility is undermined. Fascinating. And what do we suspect he will do? I think Warsh has made clear that he is someone who does not. like inflation, that I just don't think that we're going to see him depart from that so dramatically. No Fed chair wants to be remembered as a Fed chair who led the economy down a bad path. And that's, I think, going to be the thing that continues to kind of moderate how he behaves and what he ends up pursuing in terms of rates.

Well, what you're outlying is that Kevin Warsh, despite all his promises of delivering change at the Fed is going to find himself taking a Powell-like position on interest rates, resisting the president's demands to cut them, and becoming Powell-like in the fact that the president's going to become furious with him that he's not getting the job done. Yes, exactly. I think that the big question for everyone is just how much runway is Trump going to give his Fed chair pick? Is he going to give him a couple of months to settle in and establish his own credibility and give him the okay to not necessarily vote for lower interest rates, or is he going to come right out of the gate and attack him for not being able to deliver

the thing that he has kind of made clear was the precondition for whoever he was going to give the job to. And I think this is really going to come to a head as early as mid-June, which is the first meeting that Warsh is going to preside over as chair. And we could be in a situation where Warsh is voting alongside Powell to hold rate steady. And that's not going to look like the regime change that he talked about. And that would start to perhaps change Powell's calculation. No, about staying on the board? Because suddenly he will have the knowledge that the person replacing him is not there to blow up the Fed and remove its independence. Does that make him perhaps over time questions, staying on the board?

So I think his decision is just bigger than that. This is really fundamentally going to come down to his perception of the threat posed by President Trump on the institution. This is ultimately going to be about whether or not Trump ceases his attacks against the central bank and allows it to do its job or if he continues them. And if Trump decides to turn on Warsh or continues his attacks on other. officials, all that's going to do is to confirm. Exactly. And it's going to keep motivating Powell to stay on. And at this point, he's made the hard decision already to stay. Well, let me end with

the question about Powell and his decision to stay on the board. Because from what you're saying, even if Warsh ends up being an ideological fiscal ally, he's going to stay on anyway. And he's going to keep arguing. The reason he's staying is to protect the Fed from politics. But by staying in a way that his predecessors for the last many decades have not, does he risk himself politicizing the Fed? Because staying on to fight the president is ultimately, whether you agree with it or not, a political decision. It might be a principal decision, but ultimately a political one. Is he making the Fed more political by doing this? I think that's exactly the criticism that Powell is opening himself up to, and I think he's aware of it. I mean, he was pressed at his final

news conference about exactly this issue. By remaining on the board, you're actually taking a political act in denying President Trump the majority of the board, which as president he would have if you left. I don't see that at all. And he really pushed back on that characterization. I don't see how this will interfere. My attention is not to interfere. You know, I was a governor for almost six years. And the tradition is at the Fed that governors who understand how difficult the role of chair is, and as a soon-to-be former chair, I do understand how hard it is to get consensus with 19. But the fact that the administration's actions are influencing his decision to stay or go

really has kind of changed the nature of what previously was a very kind of mundane personnel process that occurred at the Fed. You try to collaborate with the chair and try to support the chair when you can. When you can't, you can't. And I think that's the attitude that people generally take, and that's the attitude that I'll take. Now suddenly, that is going to cast on to other policymakers at the Fed who are thinking about leaving or staying. If you leave, does that mean that you are creating an opening for the president to put someone else in there that's going to lead the institution in the wrong direction? It starts to sound a little bit like the Supreme Court.

Exactly. And I think that the fact that, you know, people are gaming all of these things out just shows the way in which that politics has infiltrated the central bank because of these attacks from the president. Right. There really isn't any going back from this. Exactly. It'll be interesting to see how Warsh kind of deals with that pushback

if he eventually gets it from the president. and ultimately, like, how much of a bulwark he himself is going to be in protecting his own independence to do his job. Kobe, thank you very much. Thanks so much for having me. We'll be right back. Here's what else you need to another day. On Wednesday, the U.S. Senate blocked Democrats' seventh attempt

to halt the war in Iran and require congressional abuse. approval for it to continue. But a Republican defection signaled the party's growing impatience with President Trump over the war. For the first time, Republican Senator Lisa Murkowski of Alaska joined Republicans Susan Collins of Maine and ran Paul of Kentucky in voting with Democrats. In the end, a Democratic senator, John Federman of Pennsylvania, crossed party lines to cast the decisive vote to block the measure. And South Carolina's Supreme Court has overturned the murder convictions against Alex Murdoch, a lawyer found guilty of murdering his wife and one of his sons in a 2023 trial that captivated the country. The court said that interference by a court clerk

involved in the murder trial meant that Murdoch's conviction must be voided and a new trial be held. Jurors in the original trial said the clerk made prejudicial comments to them about Murdoch. Despite the ruling, Murdoch will remain in prison because he pleaded guilty to different crimes, including stealing money from his law firm and his clients. Today's episode was produced by Mary Wilson, Lexi Diao, and Ricky Nevetsky. It was edited by Mark George with help from Lisa Chow, and contains music by Marion Lazano, Rowan Emisto, Pat McCusker, and Dan Powell. Our theme music is by Wonderly.

This episode was engineered by Alyssa Moxley. That's it for the daily. I'm Michael Bobaro. See you tomorrow.