Powell's Parting Advice: Navigating Politics and Policy as Warsh Prepares to Steer the Fed

In a notable moment at Wednesday's Federal Reserve meeting, outgoing Chair Jerome Powell offered pointed, public advice for his successor, framing the core challenges of leading the world's most powerful central bank.

"Stay out of elected politics. Don't get pulled into elected politics," Powell warned, acknowledging the unprecedented political pressures faced during the Trump administration that tested the Fed's cherished independence. Yet, in the same breath, he emphasized the necessity of engaging with Congress, calling it the institution's "window into democratic accountability."

"It's not a passive burden for us to go to Congress and talk to people, it's an affirmative regular obligation," Powell stated. "If you want democratic legitimacy, you earn it by your interactions with our elected overseers."

He also urged the next chair to value the Fed's career staff, describing them as "the most dedicated to the public wellbeing" and "the most qualified group of people you will ever work with."

This counsel takes on immediate significance following Friday's announcement that President Donald Trump has selected former Fed Governor Kevin Warsh to succeed Powell when his term expires in May. It remains an open question whether Warsh, a long-standing critic of the Powell Fed, will heed this guidance.

Warsh, 55, has publicly criticized Powell's cautious "wait and see" stance on interest rates and applauded Trump's "pro-growth policies," while framing the Fed itself as an obstacle to economic expansion. His resignation in 2011 was a protest against the Fed's second round of quantitative easing, signaling a deep philosophical divergence from the post-financial crisis consensus.

In a recent Wall Street Journal op-ed, Warsh outlined a transformative agenda for the central bank, providing a clear blueprint for his potential chairmanship.

Shrinking the Balance Sheet and Rethinking Inflation: A committed inflation hawk, Warsh called for the Fed to shrink its "bloated balance sheet" and reflect on the "great mistakes" that led to 2022's peak inflation. "Inflation is a choice," he wrote, directly critiquing Powell's record. He advocates for lower rates to aid households and small businesses, arguing current policy makes "money on Wall Street too easy, and credit on Main Street too tight."

Embracing AI, Forgetting Stagflation: Warsh urged the Fed to dismiss stagflation fears, positing that artificial intelligence will be a major disinflationary force that boosts productivity and competitiveness. "A 1-percentage-point increase in annual productivity growth would double standards of living within a single generation," he argued.

Championing Smaller Banks: Aligning with Fed Governor Michelle Bowman, Warsh supports a new regulatory framework to aid small and mid-sized banks, which he claims have been "systematically disadvantaged" by current rules, slowing credit flow to the real economy.

An America-First Regulatory Stance: Breaking from recent precedent, Warsh believes Powell and former Chair Janet Yellen spent too much time on global coordination. Instead, he argues the Fed should focus on making the U.S. "the best place for the world's banks to do business," notably dismissing the extensive Basel regulatory accords: "the Basel endgame isn't America's endgame."

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Marcus Thorne, Financial Historian: "Powell's advice is a masterclass in institutional preservation. He's drawing a bright line between necessary congressional engagement and destructive partisan politics—a line that became dangerously blurred in the last administration. Warsh's agenda isn't just a policy shift; it's a fundamental re-conception of the Fed's role from global steward to domestic growth engine."

Rebecca Choi, Economist at Midwestern Policy Institute: "Warsh's focus on Main Street credit and productivity is refreshing. For too long, Fed policy has been optimized for financial markets. His AI optimism might be bold, but we need bold thinking to break out of the low-growth, high-debt paradigm. The critique of global regulatory overreach is also long overdue."

David P. Lynch, Former Bank Regulator: "This is alarming. Warsh's op-ed reads like a political manifesto, not a central banking plan. Dismissing global cooperation and Basel rules is dangerously insular. His praise for Trump's policies and his direct attacks on Powell completely ignore Powell's wise warning to stay out of politics. This nomination risks politicizing the Fed to a degree we haven't seen in decades."

Anya Sharma, Small Business Owner: "As someone who's struggled to get a loan, the talk about helping smaller banks and Main Street credit can't come soon enough. The system feels rigged for big players. If Warsh can actually make it easier for businesses like mine to access capital, that's a huge win, regardless of the political noise."

This analysis is based on original reporting from Fortune.com.