Kevin Warsh, President Trump’s pick to replace Federal Reserve Chair Jerome Powell when his term expires in May, discussed policies he thinks could lower inflation and put the economy back on a solid footing, during a February 2025 interview with Tom Bevan on the RealClearPolitics podcast. Warsh served as a member of the Board of Governors of the Federal Reserve from 2006 until 2011. “The federal government today-as we sit here-is spending 52% more money than the day before COVID,” he said. “And I don’t remember the day before COVID thinking this was an austere, efficient, well-run machine.” “We’re paying today about $ 3 billion a day in interest expense. Five years ago, we were paying $ 1 billion. The compounding of that is a real killer, and the debt levels continue to skyrocket,” he said. “And inflation is still a huge regressive tax on the American people.” “Fifty-two percent of our fellow Americans don’t have any financial assets,” he continued. “They don’t have equity in their house, they don’t have a Schwab account. They’re living off their monthly salary and wages, and that is being eaten up by inflation.” “The Fed is really on the front lines of the inflation fight — or at least they should be,” he said. “That’s what Congress created the Fed to do: to ensure stable prices. And prices have been anything but stable.” “My friends at the Fed have let inflation run out of control. I think part of the reason they’ve done that is that the theory of inflation they’ve been trotting around simply isn’t working. They think inflation comes about if the American people are working too hard and getting paid too much. None of that is true. Inflation comes about when the government spends too much and the central bank prints too much, and both of those things are happening.” Trump can do three things about inflation, Warsh said: “One, he can take this fiscal spending and really compress it. In economics, what we call an expansionary fiscal contraction means taking this wasteful spending very seriously. That 52% increase in government spending since COVID? He’s got to cut that. He’s got to stop the spending, which is going right into the economy, not for any good purpose, but driving inflation.” “The second thing the president needs to do, and after 30 days, he seems to be absolutely on the right track to do it, is a deregulatory tax cut,” Warsh said. “He needs to take the sand out of the gears that have been built into the regulatory regime over the last four years and get rid of it. What does that do? That’s disinflationary. It lets animal spirits thrive, lets the economy grow, and allows productivity to be higher.” “Third and finally, I think he needs to ensure that he’s got people in place under him who can execute on the agenda that he ran on and has been trying to govern on in the last 30 days,” Warsh said. “When you have this kind of reckless fiscal spending, borrowing the money from foreign governments that don’t quite like us, at terms we can’t quite afford, for projects we don’t need, that is a deeply regressive tax. It requires emergency action, the kind of emergency action you’d take in a financial crisis like 2008 or a pandemic crisis like 2020.” “We need to persuade financial markets and the world’s investors that the United States is back on the path of fiscal responsibility-that we are prepared to lead the world as a serious, responsible country, putting our own house in order, growing our economy, and having an economic boom.” “The world most of us grew up with that had huge prosperity for the U.S. was a world of more integrated capital markets and product markets, and the multilateral institutions that were created after World War II,” Warsh said. “Well, in the 21st century, they’re breaking down.” “We are at a regime change in the conduct of economic policy, and we need to build a set of new institutions, new American leadership, so the 21st century can be as good for the American worker and the American economy as the 20th century was.” Here is a full transcript of the interview:

TOM BEVAN, RCP: Kevin Warsh is the Shepherd Family Distinguished Visiting Fellow in Economics at the Hoover Institution at Stanford University. You wrote a piece in The Wall Street Journal a couple of weeks ago talking about inflation and Donald Trump. In that piece, you said Trump has inherited a real mess. Explain what Trump is facing right now as he looks at the economy and the fiscal situation in the United States. KEVIN WARSH: He’s inheriting a fiscal and monetary mess. Fiscal policy, of course, is what Congress has done on taxing and spending, and that’s awfully messy. The federal government today-as we sit here-is spending 52% more money than the day before COVID. And I don’t know about you, but I don’t remember the day before COVID thinking this was an austere, efficient, well-run machine. We’re spending a ton. We borrowed almost all the money. We’re paying today about $ 3 billion a day in interest expense. Five years ago, we were paying $ 1 billion. The compounding of that is a real killer, and the debt levels continue to skyrocket. That’s a mess, and it needs to be brought under control. The president is inheriting that. And on the monetary front, he’s inheriting inflation that is still a huge regressive tax on the American people. Fifty-two percent of our fellow Americans don’t have any financial assets. They don’t have equity in their house; they don’t have a Schwab account. They’re living off their W-2 income, their bi-monthly salary, their wages-and that’s still getting eaten up by this inflation, which has now been around for a long time. BEVAN: So what’s the answer? From a policy perspective, what can the Fed do? What can the Trump administration do? How do we get out of this? WARSH: The Fed is really on the front lines of the inflation fight-or at least they should be. That’s what Congress created the Fed to do: ensure stable prices. Prices have been anything but stable. The Fed-my friends at the Fed, for whom I have great respect, and where there are many talented people-let inflation run out of control. I think part of the reason is the theory of inflation they’ve been using simply isn’t working. They think inflation comes about if the American people are working too hard and getting paid too much. None of that is true. Inflation comes about when the government spends too much and the central bank prints too much-and both of those things are happening. Once inflation got out of control, the Fed should have quashed it. Instead, they’re playing around at a level that’s still quite dangerous. If they won’t do anything about it, the president has to. He can do three things. First, he can compress fiscal spending-what economists call an expansionary fiscal contraction. That means taking this DOGE stuff very seriously. That 52% increase from five years ago? He’s got to cut that. He has to stop spending that’s going straight into the economy, not for any good purpose, but driving inflation. Second, the president needs to pursue deregulatory tax cuts. In the first 30 days, he seems to be on the right track. He needs to take the sand out of the gears that have been built into the regulatory regime over the last four years and get rid of it. That’s disinflationary. It lets animal spirits thrive, allows productivity to rise, and helps the economy grow. Third, he needs to ensure he has people in place who can execute the agenda he ran on and has been trying to govern on over the last 30 days. BEVAN: You mentioned DOGE. I assume you’re in favor of the cuts that have been proposed. Are there concerns about cutting too much-cutting willy-nilly, letting go of people with real expertise, whether security-related or just a brain drain? Do you worry about that, or are you in the Kevin O’Leary cut, cut, cut as much as you can camp — because you have 24 months? WARSH: Well, I hope we have longer than that. I’d say it differently. They spent willy-nilly. They grew government willy-nilly. They regulated us into France willy-nilly. Now, when you have that kind of reckless fiscal spending-borrowing money from foreign governments that don’t quite like us, at terms we can’t quite afford, for projects we don’t need-that are a deeply regressive tax, and it requires emergency action. The kind of emergency action you take in a 2008 financial crisis or a 2020 pandemic crisis. It doesn’t seem to me the right way to handle that recklessness is to do a McKinsey study. No-you take a knife to it. Is it possible you cut too much in one area? I haven’t seen that in my adult lifetime, so that’s a risk I’m willing to take. BEVAN: We’re speaking with Kevin Warsh, Shepherd Family Distinguished Visiting Fellow in Economics at the Hoover Institution. There was an idea floated recently about taking DOGE savings and cutting checks to taxpayers. Kevin Hassett said it wouldn’t be inflationary because people would save a lot. But doesn’t that defeat the purpose if we’re just recycling the money? WARSH: I haven’t seen it, I’ve heard it whispered. I don’t know if plan is the right word. My judgment is we need to persuade financial markets and global investors that the United States is back on a path of fiscal responsibility-that we are prepared to lead the world as a serious, responsible country, putting our own house in order, growing our economy, and having an economic boom. So I think you need to demonstrate that fiscal rectitude. Why do you need to do that? Because if you do that, you can get 10-year interest rates to fall, and you get mortgages to fall, and you can really drive this machine. We should have massive fiscal savings. The good news is there’s a tax bill that’s coming-maybe it’s in three months, maybe it’s in six months. Once we know the savings in the next 12 months, in the next nine or 10 years, that should be in a big revenue and tax bill that the Congress deliberates, the president weighs in on, and his Treasury secretary weighs in on. And I expect there to be real savings, and I want to see that in further marginal rate cuts for the corporate sector-for businesses, for small businesses. So I’m not a willy-nilly guy. I’m a deliberate guy. And my judgment is: let’s count the savings, let’s get it big, and let’s think about that in the context of our fiscal responsibility and a massive growth plan-which the president and the country needs by the end of this year. TOM BEVAN: The other big debate going on in Washington in particular is about tariffs-and the idea that these are going to be a real problem. Trump is already-he’s slapping tariffs all over the place. Where do you stand on tariffs? The way the president has executed them, are they too arbitrary, or are they just a tool that he’s using to sort of-as some people have said-a behavior modification tool to get what he wants from Mexico at the border, or wherever else he’s employing them? WARSH: So I think we have two faces. I don’t think we’ve really implemented any of the president’s tariffs-or in any meaningful way-as of yet. He’s only been president for 30 days, for goodness sake. But they have achieved some positive outcomes. So if you think about tariffs first through the lens of power: The president-this president-and my guess is future presidents will be using the tariffs and threat of tariffs to extract non-economic things that we need from other countries, both allies and adversaries. So I think we’re still in that phase. By the time we get into the tax bill-which again, it could be over the next several months-I expect, I don’t know for sure, but I expect that there will be a systematic tariff policy. And if you are a country that is lowering tariffs with the U.S., lowering barriers to U.S. companies and U.S. investment, then you will reciprocally have less tariffs or no tariffs at all if you want to do business in the U.S. So the president’s theory, which he’s explained previously, has good economic history behind it. It’s a theory of reciprocity. And so I think we’re going to go from a power lens to an economic lens. And at the end of the day here, it might be that we end up with lower tariffs around the world for American businesses, and you might end up with a more integrated set of allies and a set of adversaries that are on the wrong side of that line, as we think about the challenges of the 21st century. BEVAN: But this is a real- I mean, you’ve studied this and you know this. From my side-not the economic side but just the political side watching this-this is a real sea change for the Republican Party. For 40 years the orthodoxy was, you know, free trade is good for everybody, rising tide lifts all boats. Trump’s been saying this for 30 years: we’re getting ripped off. That’s one of the main reasons I would argue that he ended up in power in the first place, because that resonated with folks. He’s fundamentally changed the Republican Party into a working-class party because he’s spoken to those concerns of people in the Rust Belt and others who’ve suffered at the hands of what had been the Republican orthodoxy. How big of a deal is that when you look at the sweep of history in the grand scope? WARSH: So I think it is true that leading lights of the Republican Party and the conservative movement think differently about tariffs and sound differently about a range of economic policies than had been the case of our grandparents’ Republican Party, or even our father’s Republican Party. But I’d also say, to be fair to the new thinking, the world is different. The world that most of us grew up with that had huge prosperity for the U.S. in the ’80s and ’90s, for example, was a world of more integrated capital markets and product markets and the rest, and the multilateral institutions that were created after World War II by George Shultz and the great leaders of the party. Well, in the 21st century, they’re breaking down-the IMF, the World Bank, the World Trade Organization, the GATT and all these predecessor organizations, the United Nations. So I do think you’re right: we are at a regime change in the conduct of economic policy, and we need to build a set of new institutions, new American leadership, so the 21st century can be as good for the American worker and the American economy as the 20th century was in the post-World War II environment. So I share your view that this is a change in policy. But the world’s changed too. And the president’s been leading on taxes, he’s been leading on regulation, and to be candid, none of us know what the president’s endgame is on tariffs and trade. I am very open-minded that the world will be more open to U.S. companies and goods. He’s been in the job 30 days, and I’m prepared to give him more time to achieve better outcomes.

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