On Tuesday morning, the seven Washington-based governors of the Federal Reserve and the twelve presidents of the system’s regional reserve banks will gather at the Fed’s headquarters in Foggy Bottom to discuss the economy and what to do about interest rates. Since Congress created the central bank, in 1913, these policy meetings have been held in times of war, sky-high inflation, and raging pandemics, but never in circumstances like these. The meeting is scheduled to be the last presided over by Jerome Powell, whose term as Fed chair expires next month. But when the nomination of the Republican banker Kevin Warsh, Donald Trump’s pick to replace Powell, stalled in the Senate over a deeply dubious Justice Department investigation into Powell’s handling of cost overruns at a Fed renovation project, Powell vowed to stay on until the succession issue was resolved. A few days ago, it seemed perfectly possible that he would still be there in June for the next policy meeting. It was an unprecedented standoff.

Last Friday, Trump backed down. His longtime friend and ally Jeanine Pirro, a former Fox News commentator who now serves as the U.S. Attorney for Washington, D.C., announced that her office was closing its investigation of the cost overruns and handing the matter over to the Fed’s inspector general. On Sunday, the Republican senator Thom Tillis, of North Carolina, who had blocked Warsh’s nomination in protest at the Administration abusing its power to go after Powell and the Fed, said that he would allow it to proceed, opening the way for Warsh to be confirmed before Powell’s term ends in May.

Assuming that happens, Powell’s tenure as Fed chair will end on a high note. “Jerome Powell stood tall,” Joe Brusuelas, a chief economist at the consulting firm RSM, told Yahoo Finance. “He stared down the president. The DOJ blinked.” That’s true, but it doesn’t tell the full story of how Powell and the Fed defied a President who has long been determined to exert some control over its policy actions. It also doesn’t address the question of whether, with Warsh replacing Powell, the Fed’s independence could be preserved for the remainder of Trump’s second term. On this score, Warsh’s performance at a confirmation hearing last week was far from reassuring.

Powell deserves a lot of credit. At the start of this year, when Pirro launched the investigation into cost overruns, which targeted him personally, he could have kept his head down and hoped it went away. Instead, he publicly denounced the effort to intimidate him and his colleagues, saying, “Public service sometimes requires standing firm in the face of threats.” At the time, I noted that Powell’s stand “put to shame the heads of law firms, universities, and public companies who have caved to the White House.” That assessment stands, but the Fed chair couldn’t have faced down an authoritarian President on his own. He needed the backing of the courts and Congress.

In March, a federal judge quashed a pair of subpoenas that Pirro’s office had obtained from a grand jury and sent to the Fed. “There is abundant evidence that the subpoenas’ dominant (if not sole) purpose is to harass and pressure Powell either to yield to the President or to resign and make way for a Fed Chair who will,” the judge wrote. “On the other side of the scale, the Government has offered no evidence whatsoever that Powell committed any crime other than displeasing the President.” The Justice Department appealed, to no avail.

These weren’t the only legal setbacks that Trump encountered. Last August, he tried to fire one of Powell’s colleagues, Lisa Cook, citing allegations of mortgage fraud which emanated from one of his political allies, Bill Pulte, the director of the Federal Housing Finance Agency. A federal judge temporarily blocked the dismissal, saying that the charges against Cook, who hadn’t been given the chance to contest them, were likely insufficient to justify her firing. After a federal appeals court confirmed this rebuff, the case went to the Supreme Court, which hasn’t yet issued a ruling. But, at an oral hearing in January, liberal and conservative Justices both expressed deep skepticism about the government’s case. Accepting the President’s view that he had the right to fire Cook would “weaken, if not shatter, the independence of the Federal Reserve,” Justice Brett Kavanaugh said.

On a Republican-run Capitol Hill, capitulation to Trump has replaced active oversight as the general rule. In this instance, Tillis broke away from the cowed G.O.P. pack. From his perch on the Banking Committee, where his party holds a majority by just two seats, Tillis vowed not to let Warsh’s nomination proceed to the Senate floor until the Justice Department dropped its investigation of Powell and the Fed. Last week, he reaffirmed this stance and described the probe as “bogus.” Since Tillis had already made clear that he isn’t running for reëlection, Trump couldn’t use his normal bullying tactic—threatening to endorse an opponent.

For once, the division of powers appeared to be working as designed. But it’s worth noting that the pushback against Trump rested on two things that are time-limited: Powell’s leadership and Tillis’s presence. When it comes to protecting the independence of the Fed for the rest of Trump’s term, much will depend on the outcome of the midterms, and on Warsh’s willingness, to stand up to a President who nominated him for a job he has long coveted and whose desire for rock-bottom interest rates Warsh has cynically indulged. (“Interest rates should be lower,” he told Fox Business last year.)

The case for Warsh is that he has prior experience at the central bank, where he was a governor from 2006 to 2011. “I have every expectation he’s gonna take the job really seriously. He cares about the Fed,” Austan Goolsbee, an economist who served in the Obama Administration and is now president of the Chicago Fed, told the Financial Times. Earlier this month, Jamie Dimon, the head of JPMorgan Chase, called Warsh “a great candidate” for Fed chair.

Throughout his career, which saw him go from Stanford to Harvard Law School to Morgan Stanley to the White House of George W. Bush, all by the age of thirty-five, Warsh has certainly proved to be an effective networker and self-advancer. After leaving the Fed in 2011, he worked for the hedge-fund billionaire Stan Druckenmiller and accumulated holdings that the Wall Street Journal estimated could be worth more than two hundred million dollars, based on his financial disclosure forms. That doesn’t necessarily disqualify him—Powell, too, had amassed riches before he became the Fed chair. But the question relates to his judgment and independence. At last week’s hearing, Senator Catherine Cortez Masto, a Nevada Democrat, reminded Warsh that in 2007, the year before the financial crisis erupted, he downplayed the systemic risks posed by subprime lending. He also hailed the expansion of derivative markets. After the market for subprime mortgages and the derivatives associated with it blew up, bringing down Bear Stearns and Lehman Brothers, Warsh acted as Ben Bernanke’s intermediary to Wall Street as the Fed participated in an unprecedented bailout of the banking system. Subsequently, Congress tightened up the regulatory system and forced banks to retain more capital in case of emergencies—an initiative that the second Trump Administration is now rolling back on, with Warsh’s support. In an op-ed last November, he hailed Trump’s deregulatory agenda as “the most significant since President Ronald Reagan’s.”

It’s not always clear whether Warsh is expressing his own views or positioning himself politically. In a scathing assessment of his record, Skanda Amarnath, the executive director of Employ America, a research and advocacy group, noted that Warsh’s “monetary policy views have shifted with the occupant of the White House for two decades, with an ever-increasing fixation on whatever aligns with the preferences of President Trump.” In September, 2009, under Barack Obama, with the unemployment rate close to ten per cent, Warsh warned against keeping rates too low for too long. In December, 2018, during Trump’s first term, with unemployment at just 3.9 per cent and the Fed already modestly raising rates, he called for an end to its policy tightening.

Warsh has offered some notable ideas, including changing the Fed’s communications strategy and working with the Treasury Department to reduce the size of its balance sheet, which has swelled to $6.7 trillion as the Fed has engaged in successive rounds of quantitative easing, which involves printing money to buy Treasuries and mortgage bonds. There are complex economic issues, with legitimate arguments on both sides. But the biggest question about Warsh relates to something simpler: his spine. During last week’s hearing, he repeatedly pledged to be independent, but he wouldn’t say whether Trump lost the 2020 election; he wouldn’t comment on the President’s blatantly political effort to fire Lisa Cook; and he refused to identify a single element of Trump’s economic agenda that he disagreed with. Hostage videos have contained more convincing displays of independence.

With a new Fed chair who has cozied up to him, Trump would surely feel emboldened. Last week, he said that he’d be disappointed if Warsh didn’t cut interest rates right away. The optimists’ fallback is that even if Warsh did buckle to Trump, the collegial nature of Fed decision-making would prevail. If Warsh’s nomination goes through and Powell also gives up his regular board seat, the term of which doesn’t expire until 2028, the number of Trump appointees on the Fed’s key policymaking committee will eventually rise to four. There will be three other governors, and the balance of power will be held by the regional reserve-bank presidents, who have five votes. These days, they tend to be middle-of-the-road technocrats with Ph.D.s in economics.

That sounds reassuring, but it doesn’t account for how the markets would react to internal strife at the Fed, which, given the institution’s current commitment to transparency, would likely play out in public votes and statements by senior officials. For decades, investors around the world have viewed the Fed as an island of stability in a dysfunctional governing system. If this reputation were undermined, the consequences could be enormous. Wall Street is wagering that Warsh would handle the pressure, resist Trump’s encroachments, and retain investors’ confidence. Maybe. Based on his prevarications on Capitol Hill, the bet looks like anything but a sure thing. ♦