Kevin Warsh, President Trump’s Fed nominee, appeared before the Senate Banking Committee today and was passed with flying colors. It’s the best way I can say it. It could be a new era for the Federal Reserve, as Mr. Warsh laid out his long-held view that the central bank’s powers have grown too far and too broad and should be curbed.
That the balance sheet of assets and liabilities should be similarly downsized, and that it was never intended to become an overbearing central economic planning agency. And that independence from monetary policy is essential. Yet it must be earned. In his testimony, Mr. Warsh said that “low inflation is the Fed’s conspiracy armor, its essential defense against slings and arrows. So when inflation rises — as it has in recent years — serious harm is done to our citizens, especially the least well-off.”
And finally, the Fed must stay the course. No politics. No diversity, equity and inclusion, no climate change, no lobbying of state legislatures, and so on. Mr. Warsh questioned some hidden Fed practices, such as forward guidance and the constant chatter of reserve bank governors. He indicated that it is time to look for new economic models.
Mr. Warsh is an optimistic growth man who does not believe that low unemployment means higher inflation, but does believe in the growth power of tax cuts and deregulation. He also suggested that Federal Open Market Committee meetings could resemble a “family fight,” saying, “I prefer messier meetings than some where people don’t show up with rehearsed scripts.” He added: “We can have a good family fight if the central bank fights that good family fight. I think they will make better decisions. And if they make mistakes, they are more likely to correct them.” He even disputed inflation indicators that suggested that average inflation or reduced average inflation, where you take out the high and low outliers, could be better than the direct consumer price index or the personal consumption expenditure deflator.
At one point he mused aloud that it is difficult to make monetary policy without ever talking about money. Asked about his forecast, he suggested that the overall contours of the economy are improving, but we can do better, that peak inflation has fallen but could also get lower, and that interest rates are a better tool than the Central Bank’s balance sheet.
Mr Warsh also defended his long-term view that rapid technological developments such as AI are likely to increase productivity, reduce business costs and inflation and ultimately lower interest rates.
Yet he made no formal interest rate forecasts. And when he was insulted by far-left Democratic Senator Elizabeth Warren that he would somehow become Trump’s “sock puppet,” whatever that means, he made it clear that Trump never asked him to commit to a specific interest rate in his interview with the president: “The president has never asked me to commit to a specific interest rate decision period, and I would never agree to it if he had.” But he never did that.’
I’m not surprised. Ms. Warren was her usual pain in the neck, holding up the hearing with all kinds of gibberish about Mr. Warsh’s compliance with ethics commitments and divesting his own portfolio. Of course, the Wall Street Journal editorial was right: The hearing was about the Fed’s balance sheet, not Mr. Warsh’s. Even Senator Thom Tillis stood up for Mr Warsh, saying he was in full compliance with ethics agreements and asset sales. As I said, Mr Warsh passed with flying colours. And he will bring a much-needed breath of fresh air to the central bank. Now let’s get him across the finish line as quickly as possible.
