Q&A – The Federal Reserve Renovations & Kevin Warsh’s Confirmation Process
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Today’s entry: Hi Brian, I agree that there should be a probe into the absurd $2 billion Federal Reserve Renovation. But I don't understand how the probe has complicated Trump’s efforts to see Kevin Warsh confirmed. Or why Sen. Tom Tillis, a Republican, is refusing to vote for any nominees while the investigation continues. Or why Powell has said he plans to stay on as governor until the probe ends. Thanks for your clarity on this!
Bottom Line: President Trump’s nominee to become the next chairman of the federal reserve has begun to move forward. Kevin Warsh’s confirmation process to replace Jerome Powell is underway with Warsh having had his first senate hearing this week. Warsh objectively performed well in navigating a challenging process highlighted by President Trump’s extensive criticisms of current Federal Reserve Chairman Jerome Powell, and as mentioned, the Department of Justice’s criminal investigation into the Federal Reserve’s $2.5 billion headquarters renovation. With that said, I’ll dive into the points outlined in today's note. Let’s start with the investigation into the renovation...
Last November the Justice Department opened a criminal investigation into Federal Reserve Chairman Jerome Powell related to his testimony before Congress regarding “cost overruns” for the Federal Reserve Headquarters renovation project that was estimated to cost $1.9 billion when undertaken in 2022, but that now is estimated to cost $2.5 billion upon completion next year. While much of the attention to the story has focused on the total cost of the project, notably, the criminal investigation centers on whether Powell lied in his testimony to congress as the costs associated with the renovation escalated over original guidance. That’s highly important in this conversation.
The Federal Reserve is an independent system. As an independent agency, it’s not taxpayer funded. Rather, the Federal Reserve system is self-funded with money derived from fees charged by the Fed for services provided for financial services in addition to interest obtained through its U.S. government securities holdings. Therefore, the elaborate renovations for the Fed’s headquarters come at zero taxpayer dollars.
The one dynamic that does come into play as it pertains to taxpayers is that surplus funds from the Federal Reserve are provided to the Treasury. In other words, the Federal Reserve’s operations are both self-funding and profitable for taxpayers. That remains the case regardless of the cost of the renovation project – though an argument could be made that taxpayers would benefit more if the renovation wasn’t as expensive.
There’s a heavy dose of irony and perhaps hypocrisy associated with this story from both sides. President Trump’s currently halted $400 million White House ballroom project is in many ways a different version of a similar thing. The project was originally billed as a $200 million expansion of the White House, is now said to be $400 million, and it’s completely privately funded. From my perspective, I agree with President Trump on the ballroom and understand where Jerome Powell is coming from with the Federal Reserve’s renovations. That’s a consistent position.
Here’s a question to ask yourself about the Fed reno. If you had the ability to spend most of your free cash flow on renovating your workplace or to pay that money in additional taxes instead, what would you do? As for Senator Tillis...
So yes, North Carolina Republican Tom Tillis, who is retiring from the senate at the end of this term, has stated that he’ll block the nomination of Kevin Warsh to replace Jerome Powell as federal Reserve Chair until the Department of Justice ends its criminal investigation into Jerome Powell as he believes the investigation is retribution for Powell not agreeing to cut interest rates as President Trump has consistently pressured him and the other Federal Reserve governors to do. During the Senate hearing with Warsh, Tillis raved about Warsh’s qualifications to lead the Federal Reserve and said that he looked forward to voting for him after the DOJ inquiry is dropped.
While I happen to think Tillis is likely right about the premise of the criminal inquiry into Powell, I strongly disagree with his approach. Regardless of the perceived legitimacy of a criminal inquiry by the DOJ, it’s outrageous to attempt to use a Senate nomination process as leverage to exact desired outcomes with the Department of Justice but that’s where we are and that takes us to your final question.
Jerome Powell’s term as the Chair of the Federal Reserve ends on May 15th, or only in a few weeks. However, his term as a Federal Reserve governor doesn’t end until 2028. The Federal Reserve is a Board of seven different fed governors all who are appointed by the president and all who are confirmed by the Senate. In other words, it’s Powell’s prerogative to stay at the Federal Reserve through his full Senate confirmed term if he chooses.
What’s more is that if there isn’t a newly confirmed chair of the Federal Reserve by May 15th, Powell will remain in place as the Chair of the Federal Reserve until a nominee is confirmed. The next few weeks figure to be interesting – that potentially includes decisions made at the DOJ (about Powell’s case), which is of course currently influx after President Trump’s ouster of Pam Bondi as AG.