Kevin Warsh has homed in on three key phrases. How Fed watchers interpret them
He’s not quite at the level of vagueness of former Federal Reserve Chairman Alan Greenspan, but new Fed chief Kevin Warsh has settled on a few phrases that stand out for their repetition and lack of clarity.
Warsh has publicly used the phrase “family feud” 13 times, going back to “first principles” 11 times, and “inflation is a choice” for the Fed six times, five times starting with his nomination hearing in April, his first press conference, a roundtable in Portugal, and two congressional testimony.
But what these expressions mean in terms of monetary policy is more difficult than calculating their use. But with a president who has decided to say less than his predecessors, there is an advantage to understanding his choice of words.
CNBC asked five close Fed watchers for their views on what these three statements mean to them.
‘A good family fight’
Dan Greenhaus, strategist, Solus Alternative Asset Management:
“If Chairman Warsh encourages more open debate around policy and creates an environment in which prevailing assumptions can be challenged rather than simply accepted, this will ultimately lead to better policymaking. The benefit is to improve the quality of the decision-making process over time, rather than to change the outcome of any individual meeting.”
Loretta Mester, former Cleveland Fed president:
“Providing the environment [Federal Open Market Committee] The meeting allows all views/discussions to be heard. I would like to point out that this atmosphere was already present when I was at the FOMC. I have never felt constrained in what I said or the politics I discussed. In reality, there are 19 people around the table, so there needs to be some order, otherwise it will be difficult to get in because only the loudest voice in the room will be heard and fewer opinions will actually be expressed.”
Claudia Sahm, chief economist at New Century Advisors:
“FOMC meetings tend to be highly scripted affairs, with prepared statements read aloud and limited conversation. Warsh wants a livelier back-and-forth, a style he’s more comfortable with. The format is unlikely to influence policy decision, and 19 attendees is a large group for a public conversation.”
Mark Spindel, Fed writer and chief investment officer of Potomac River Capital:
“To Kevin, this is his aphorism about the natural debate that goes on within the FOMC and the Board. It alludes to obvious disagreements, but like all ‘family squabbles,’ it’s better kept to family members and not made too public. I think that’s the second part that committee colleagues (and market participants) find problematic and out of line with priorities. Committee members are clearly willing to disagree, or at least express their views much more openly (than Chairman Warsh). This also excludes responsibility.” It is a way to deflect from pressures (POTUS, CONGRESS, MARKETS).”
Michael Feroli, JPMorgan’s chief US economist:
“I think the family feud is about him trying to be cordial, but it doesn’t break with tradition. [Ben] Bernanke welcomes dissenting views (to the public).”
‘first principles’
Shaft:
“This is vague enough to express what Warsh means, but in context it seems to be the basis for the decision-making and structural reform he lays out. Over the summer he said (in Sintra) that his colleagues in the Central Bank leadership shared ‘a desire to go back to first principles’ in questioning the whole process of monetary policy-making. I think his reintroduction of monetary aggregates, his endearing phrase ‘monetary policy must have something to do with money’, is cut from the same general cloth as ‘first principles’. Unfortunately, science of monetary policy and given the other workhorses of monetary policy (the Phillips Curve), economic forecasts don’t seem to help even Warsh’s first principled approach. He did not shy away from blaming and denouncing the yearly failures in inflation. [Jerome] Powell and company. “Low interest rates, balance sheet, failure to tighten sooner, FAIT and so on were (according to Warsh) a departure from ‘first principles’.”
:
“‘First principles’ is code for ‘questioning everything.’ Warsh has repeatedly said he wants ‘regime change’ at the Fed, and questioning fundamental assumptions about how monetary policy is conducted fits that agenda. I doubt Warsh can rewrite first principles. Showing that an assumption is flawed is not enough; it requires introducing a better replacement. Even with task forces, Warsh will likely fall short on new first principles: no regime change in monetary policy, but some incremental improvements in how it is done.”
Sir:
“Reconsider the way the Fed achieves its dual mandate goals of price stability and maximum employment without preconceived notions or assumptions, or block approaches because they may differ from the current approach. First, consider what is the best approach for communications, inflation and labor market assessment, balance sheet and operating framework, and data sources. Then consider how to transition to these new approaches.”
“Remember that the committee tends not to want to make major changes; think about how many times the statement has changed by just one or two words. This rethinking from first principles frees the committee to consider new approaches rather than small changes. They will then have to think about how best to transition there.”
Feroli:
“The ‘first principles’ line seems to be in the same spirit as his comment about PhDs from elite institutions not keeping money in monetary policy. Both seem to suggest that the institution is allowing academically oriented types to distract the Fed from focusing on a few basic economic principles. (Powell didn’t have a PhD either, but he certainly seemed less defensive about it!)”
Greenhaus:
“Going back to first principles could have important implications for policymaking. What is the Fed’s mission and how should it go about fulfilling that mission? Whether or not you agree with this more ‘originalist’ approach, this seems to be the direction Warsh wants to take the agency. He proposes a more limited role for the Fed beyond monetary policy, including more skepticism about its involvement in areas like regulatory policy and climate-related issues. More broadly, there is also more skepticism about the Fed’s involvement in areas like regulatory policy and climate-related issues.” The Fed’s role has expanded since the Global Financial Crisis, and whether that expansion has gone too far.”
‘Inflation is a choice and the Fed must take responsibility for it.’
Sir:
“This reminds me of the following sentence by Milton Friedman: “Inflation is always and everywhere a monetary phenomenon; In this sense it can be produced and produced only by a more rapid increase in the quantity of money than in production.”
“In the long run, to ensure price stability, the Fed must ensure that aggregate demand does not grow stronger than aggregate supply. Otherwise, price pressures and sustainable inflation will arise.”
“Note that there may be times in the short term when supply is temporarily disrupted and prices rise for certain goods and/or services. The Fed will want to study this because the supply disruption will end once a monetary policy action impacts the economy – this is due to long and variable lags in monetary policy effects. But when supply disruptions last longer or there is a series of multiple disruptions (as after the pandemic and now), the Fed needs to ensure that monetary policy is restrictive enough to keep demand in line with supply. Otherwise, there will be a sustained rise in inflation.”
:
“‘Inflation is a choice’ is a reference to Warsh’s mentor, Milton Friedman, who said that ‘inflation is always and everywhere a monetary phenomenon.'” The Fed’s framework already includes a version of this: “the rate of inflation over the long run is determined primarily by monetary policy.” Warsh is repeating something the Fed has said for years but omits the time frame, and that omission is important. In the short run, supply shocks like energy shortages or tariffs can move inflation regardless. The Fed does this. “Warsh’s statement is unlikely to change other Fed officials’ views on monetary policy, but it could confuse the public about what the Fed might do.”
Greenhaus:
“To its logical conclusion, this suggests that the Fed is less willing to tie its long-term inflation targets primarily to exogenous factors such as tariffs, fiscal stimulus, or supply shocks. Warsh’s message is essentially that “the problem is over for us.” As a result, Chairman Warsh said, [be] He is less tolerant of explanations for persistently high inflation that do not acknowledge the Federal Reserve’s own role. In his view, the Fed may not be responsible for every inflationary shock, but it is ultimately responsible for ensuring that these shocks do not turn into permanent inflation.
Feroli:
“I think his statement, ‘Inflation is a choice, and the Fed must take responsibility for it,’ sits oddly next to one of his other slogans, ‘I don’t believe we’re making a cruel choice.’ It is a central pillar of modern monetary economics that inflation is a choice that is under the control of the central bank over the long term, so most people will have no problem with his first slogan (though how much in the long term is more debatable). But the idea that there is no short-term trade-off between growth and inflation begs the question: The Fed Why choose inflation?The economic argument for central bank independence is based on the idea that a politically motivated central bank may be tempted to exploit this short-term trade-off to stimulate the economy at the expense of long-term price stability.
Shaft:
“This is another statement that could mean what Warsh means. It is entirely consistent with his (and the committee’s) restatement of inflation mandates in the first FOMC statement under the KW: ‘the committee will maintain price stability.’ Although when questioned aggressively Senator John KennedyWarsh, R-Louisiana, struggled to explain exactly what he would do about it. After all, he’s run into trouble, higher rates may be on the way. He criticized his predecessors, who he implied were content with high inflation rates. As for ‘the Fed assuming this responsibility’, I agree with Chairman Warsh. “Simply put, the Fed sets the price of money, and if money is too cheap, the Fed must take action.”
