Warsh hints at a new reading of the Fed’s power over swap lines

Federal Reserve chair nominee Kevin Warsh believes the Fed’s statutory independence doesn’t fully extend to international policy issues, he said in in written responses published Tuesday to Senate Democrats’ questions about the Fed’s authority to establish swap lines.

Warsh in those comments also flatly denies having any connection to deceased sex offender Jeffrey Epstein and hints he will abide by a plan to rely on the Fed’s inspector general to resolve a federal criminal investigation into the Fed under its current chair Jerome Powell.

Swap lines have become an urgent question in Washington after the Wall Street Journal reported earlier this month that the United Arab Emirates had discussed opening one during conversations about potential U.S. assistance for any Iran war-related economic fallout. Treasury Secretary Scott Bessent later said many countries in the Persian Gulf and Asia have requested swap lines.

Sen. Elizabeth Warren, D-Mass., asked Warsh whether he believed the Fed could refuse a request from Treasury to extend a swap line to a given country or if the Fed needed to consult with Treasury when opening or closing them. 

Warsh responded to those questions without explicitly mentioning swap lines. He wrote, as he has elsewhere, that “Fed independence is at its peak in the operational conduct of monetary policy,” in other words, the setting of interest rates. 

He went on. “Fed officials are not entitled to the same special deference in areas affecting international finance, among other matters. In those matters, the Fed will work with the Administration and with Congress,” Warsh wrote.

Warsh declined to comment when asked to elaborate on his views. The Treasury and Fed also declined to comment.

Swap lines can serve different purposes. The Fed extended several to large, developed economies during the 2007-2008 financial crisis. Those lines helped ensure countries such as the U.K. had enough dollars in a liquidity crisis. They were implemented as emergency measures but also became seen as a source of prestige, since few countries had them and therefore had direct access to the Fed.

The Fed generally sees swap lines as a way to ensure market functioning rather than as a way to provide aid.

The U.S. Treasury Department can also deploy swap lines. Bessent granted Argentina access to a Treasury swap line last year when the peso was facing a currency run. But the use of that facility implies an urgent crisis, which the UAE and others don’t currently face. 

The Senate Banking Committee voted along party lines Wednesday to advance Warsh’s nomination to a vote by the full Senate. He is likely to win the support of the Senate ahead of the May 15 end of Powell’s term. 

Warsh appeared in person before the committee…