Warsh hints at a new reading of the Fed's power over swap lines amid UAE discussion

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 last week and followed up in response to written questions from senators. Senate Democrats on Tuesday released the answers that responded to their questions.

A person familiar with the responses said they were delivered to the committee on April 23, two days after Warsh's confirmation hearing.

Senate Republicans, who hold the majority on the committee, don't plan a full release of Warsh's answers to them, committee spokesman Jeff Naft said Wednesday. Individual Republicans could release Warsh's responses to them.

Warsh, in the written answers, also for the first time denied having any connection to Epstein. Warsh's name appears in the Epstein files on a list of potential visitors to an Epstein gathering on the island of St Barth's in December 2010. Warren asked Warsh if he attended any parties or otherwise met with Epstein and his girlfriend Ghislaine Maxwell, who is serving time in prison. 

Warsh was on St. Barts, he said, but didn't meet Epstein. "I don't know these people, I did not attend any of their events, nor am I aware of having ever attended an event at which these people were present," Warsh said.

Warsh's answers also speak to a controversy that has recently engulfed the Fed. U.S. Attorney for Washington, D.C. Jeanine Pirro said Friday she would drop an investigation into cost overruns in the Fed's ongoing building renovations. She said she would instead allow an investigation by the Fed's Powell-appointed inspector general to play out. 

Warsh answered a separate question about another investigation with a broad statement in support of the Fed's inspector general. "Throughout my career, I have respected and supported the work of inspectors general, and if confirmed, will continue to do so at the Federal Reserve," he wrote.