How does Fed Chairman Kevin Warsh view the Fed’s inflation target?

Kevin Warsh will testify on Tuesday about his nomination to become chairman of the Federal Reserve, with senators likely to press him on his positions on the Fed. 2% inflation target given the ongoing price pressures hitting the US economy since the pandemic.

Warsh, 56, who served as Fed governor from 2006 to 2011, will testify before the Senate Banking Committee as senators consider his nomination to succeed current Fed Chairman Jerome Powell, whose term as central bank leader ends in May.

In his prepared remarks, Warsh says he’s the from the Federal Reserve dual mandate: to promote price stability and full employment, although he did not specifically address the Fed’s policy goal of keeping inflation at 2% over the long term.

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“First, Congress has mandated the Fed to take care of it price stabilitywithout excuse or equivocation, argument or fear. Inflation is a choice, and the Fed must take responsibility,” Warsh wrote.

“Low inflation is the Fed’s conspiracy armor, its essential defense against slings and arrows,” he said.

“So, when inflation is rising – as has happened in recent years – serious harm is being done to our citizens, especially the least advantaged. They lose purchasing power. Their living standards are falling. They could also lose confidence in our system of economic governance, casting doubt on whether monetary policy independence is all it is intended for,” Warsh wrote.

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Warsh has emphasized the importance of price stability and is skeptical about relying too heavily on a 2% inflation target due to the risk of measurement errors and policy errors. (Tierney L. Cross/Bloomberg via Getty Images)

Discussing his views on monetary policy objectives in 2023 at a hearing before the UK House of Lords Economic Affairs Committee, Warsh said he views price stability as a necessity but is skeptical about the ability to accurately measure inflation, which is why he prefers a bandwidth-based inflation target.

“Price stability is the North Star. Without stable prices, it is almost impossible to have full employment. It is also almost impossible to have economies growing at their full potential. When prices are volatile… difficult for households and businesses to make the sensible decisions they want,” he explained.

“Frankly, we wouldn’t know the difference whether inflation in the United States or Britain is 1.7%, 2.0% or 2.3% because we don’t measure that very accurately,” Warsh said. “Economics is not physics – at least not yet.”

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Warsh said he prefers “ranges to point estimates, partly because of measurement error and partly because I don’t think broad price stability can ever be that accurate.”

He added that in general he thinks inflation actually “prompted many central banks to over-stimulate economies a few years ago” and led to decisions that helped push inflation well above target.

“I am broadly in favor of ranges. Price stability, in numerical definition, will change over time. The structures of the global economy are changing even as we speak. It strikes me that agreeing to 2.0% on a permanent basis is asking for trouble,” said Warsh.

Inflation peaked in the US at 9.1% in June 2022 and is currently around 3%, after rising over the past year due to tariffs and the recent impact of the recent energy shock caused by the Iran war.

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The Fed’s favorite inflation gauge, the personal consumption expenditures (PCE) index, was 2.8% in February on an annual basis. March data is expected late next week.

Another popular inflation gauge, the consumer price index (CPI), showed that inflation has risen to a higher level 3.3% in March after a 2.4% increase in February due to the impact of the war on energy markets.