Fed nominee Warsh urges new approach to inflation
Federal Reserve presidential candidate Kevin Warsh has called for “regime change” for the US central bank, which would include a new “framework” to control inflation and a possible overhaul of the way it communicates with the public about monetary policy.
The 56-year-old lawyer and financier, who gave a quick hint of major changes to be made at the Fed under Warsh’s leadership during his confirmation hearing before the Senate Banking Committee, blamed the central bank for the increase in inflation following the Covid-19 epidemic, which continues to harm US households.
Warsh stated that “fatal policy mistakes dating back four or five years” are a legacy that families are still working on, and said the Fed “needs a regime change in the execution of policy. This means a new and different inflation framework.”
The shakeup also included Fed communications that “compounded” the problem, the former Fed governor suggested, a signal that the central bank might want to change things like its use of current quarterly economic and interest rate forecasts.
Warsh was asked about comments made by U.S. President Donald Trump shortly before the start of the hearing that he would be disappointed if Warsh did not receive immediate approval for rate cuts.
“Presidents are in favor of lowering rates,” Warsh said.
“President Trump makes that clear.”
“The independence of monetary policy is essential,” Warsh said in a press statement to the committee members who will recommend whether to confirm him to the Fed Board of Governors and the four-year central bank presidency.
“I do not believe that the operational independence of monetary policy is particularly threatened when elected officials (presidents, senators or members of the House) express their views on interest rates,” Warsh said.
“Congress gave the Fed the mission of ensuring price stability without excuses or evasions, arguments or anguish. Inflation is a choice, and the Fed must take responsibility for it. Low inflation is the Fed’s conspiracy armor.”
Warsh said interest rate cuts are guaranteed because technological changes unleashed by artificial intelligence will increase productivity; This view, other central bankers have said, may be correct over time, but it will not necessarily make it appropriate to lower interest rates in the short term.
The Fed has failed to meet its two percent target for more than five years, first due to the shock of the pandemic and more recently due to the impact of tariffs imposed by the Trump administration and high oil prices linked to the war in the Middle East.
Trump has repeatedly clashed with Powell over monetary policy since appointing him to chair the Fed during his first term in the White House.
Powell’s term as central bank governor officially ends May 15, but it’s conceivable he could stay in the job longer if Warsh’s confirmation is delayed.
The timing of the committee recommendation or full Senate vote is uncertain at this point.
The Fed has a board and staff based in Washington, D.C., but also includes a dozen regional banks, tens of thousands of systemwide employees, and roles that range from setting interest rates for the United States to managing the payments system, supervising and regulating banks, managing swap lines with foreign central banks, and conducting research on everything from cryptocurrencies to rural health.
Warsh, who served as Fed governor from 2006 to 2011, was deeply critical of Powell’s leadership, and the hearing provided an opportunity to explain in more detail what he plans to do differently.
“The Fed should stay its course,” Warsh said in his opening statement to the committee, echoing conservative criticism that the central bank’s work on issues such as climate change or economic equity or comments about fiscal spending are off limits.
