Wall Street’s odds-on favorite to lead the Federal Reserve lays out his vision of a central bank that retreats back behind its high walls
Kevin Warsh, a former Federal Reserve governor seen by Wall Street as the front-runner to replace current Fed Chair Jerome Powell, on Friday sharply criticized fundamental practices of the central bank.
Speaking before a standing-room audience at a conference on the sidelines of the International Monetary Fund and World Bank annual meetings in Washington, Warsh said the central bank talks too much, gets too involved in social issues of the day and lets lawmakers not pay for their excessive spending.
Observers at the event were keen to understand Warsh’s views, as he might be tapped by President Donald Trump to take over as head of the Fed when Powell’s term ends next May.
Trump said this week that he would not try to remove Powell after speculation hit a fever pitch that such a move was imminent, sparked by the president’s own words.
In essence, Warsh promised to return the Fed to where it has spent most of its more than 100-year history – as a central bank that thought it best not to talk too much to the public about how it safeguarded the value of money and tried calm to financial panics.
In essence, the Fed followed the dictum “never explain, never apologize” – attributed to the former Bank of England Governor Montagu Norman, who played a starring role in the Great Depression of the 1930s.
Observers in the 1980s noted that when members of the U.S. Congress pressed former Fed Chair Paul Volcker on a topic, the smoke from the Fed chief’s cigar would suddenly obscure him from being seen by lawmakers.
And former Fed Vice Chair Alan Blinder said that when he joined the central bank in 1994, the Fed’s longtime press officer told the rookie central banker: “We don’t talk about the economy.”
It was Fed Chair Ben Bernanke who dragged the Fed out into the open, by setting a 2% inflation target so the public could evaluate the central bank’s performance and holding press conferences to explain the Fed decisions.
But now, Warsh seems to think that Bernanke and his successors, Janet Yell and Jerome Powell, went too far.
Warsh was seen as a close ally of Bernanke’s when the two served together on the Fed board during the 2008 global financial crisis.
Warsh eventually split from Bernanke after the Fed chair decided to continue with bond buying to bring down long-term rates. Warsh thought that program, known as quantitative easing, should only be used in emergencies.
Warsh’s views seem to fit with Trump’s view that Powell gets too much attention from the media.
“Fed leaders would be well served to skip opportunities to share their latest musings,” Warsh said Friday, adding that Fed officials shouldn’t reveal their economic forecasts because they “become prisoners of their own words.”
Warsh said the Fed shouldn’t depend so much on economic indicators to make decisions, as such “data dependence” has little value. He noted government data is often out of date and subject to subsequent revisions.
In his remarks, Warsh didn’t give his opinion on the outlook for inflation and interest rates. Indeed, he said the Fed should not be telling markets about the likely path ahead for interest rates.
“The central bank should find new comfort in working without applause and without the audience at the edge of its seats,” he said.
Warsh said Powell’s Fed has played a role in the large federal budget deficits that have persisted since the end of the COVID pandemic despite the strong economy.
Fed officials encouraged the government to spend during the pandemic, but didn’t insist that it cut back spending when the economy was in better shape, he said.
Warsh also blamed the high inflation seen in the wake of the pandemic on the Fed signaling that it was willing to accept higher inflation to help battle unemployment.
The Powell Fed “misjudged the economics,” and the price was paid by low-income Americans, Warsh said.
“The Fed’s current wounds are largely self-inflicted,” he added.
“A strategic reset is necessary to mitigate losses of credibility, changes in standing and, most important, worse economic outcomes for our fellow citizens,” Warsh concluded.
Since leaving the Fed in 2011, Warsh has been a lecturer at the Stanford Graduate School of Business. He was a business partner of legendary investor Stanley Druckenmiller, and is married to Estée Lauder heiress Jane Lauder.
