Kevin Warsh on Economic Policy
TL;DR
Kevin Warsh advocates for restoring the Federal Reserve's focus on price stability by curbing its expanded role and balance sheet.
Key Points
He believes inflation is a choice and has criticized central banks for blaming external factors like supply chains or geopolitical events for price changes.
He supports a revision of the Treasury-Fed Accord (1951) to promote clearer coordination but with a smaller, less powerful central bank.
Warsh, a student of Milton Friedman, advocates for clearer rules and resists the use of monetary policy to achieve non-monetary policy goals.
Summary
Kevin Warsh's core economic policy stance centers on criticizing the Federal Reserve for mission creep and blurring the lines between monetary and fiscal policy, which he views as a significant vulnerability for the economy. He has been an outspoken critic of the Federal Reserve’s expanded balance sheet and unconventional policies, such as quantitative easing (QE), which he views as distorting markets and increasing inequality. He resigned from the Fed Board in 2011 due to disagreement over the second round of QE, despite having initially supported the emergency measures taken during the 2008 crisis. His views stress the importance of credible monetary policy, clear rules, and institutional accountability.
His proposed path for reform, which he advocates for as a way to strengthen economic performance, involves a return to a narrower mandate for the central bank. Warsh suggests shrinking the Fed's balance sheet and taking it out of private markets unless an actual crisis necessitates intervention. This approach, which he describes as practical monetarism, is intended to reduce inflation and allow for lower interest rates that benefit the real economy, while simultaneously encouraging Congress to adopt more fiscal responsibility in non-emergency times.
Key Quotes
Each time the Fed jumps into action, the more it expands its size and scope, encroaching further on other macroeconomic domains. More debt is accumulated…more capital is misallocated…more institutional lines are crossed… risks of future shocks are magnified…and the Fed is compelled to act even more aggressively the next time,”
Frequently Asked Questions
Kevin Warsh's main criticism of the Federal Reserve is its 'institutional drift,' where it has expanded its size and scope beyond its narrow central banking mandate. He argues this expansion encroaches on other macroeconomic domains and increases the economy's vulnerability to shocks, rather than focusing on its primary goal of price stability.
He is a strong critic of successive rounds of quantitative easing that occurred outside of genuine emergencies, as he believes they overheat financial markets and widen inequality. While he supported the initial liquidity injection during the 2008 crisis (QE1), he resigned over QE2 because he felt the central bank failed to retreat to a less interventionist stance when conditions were relatively benign.
Kevin Warsh proposes reforming key economic institutions, centering on putting the creation and diffusion of ideas at the forefront and subjecting monetary policy to strict scrutiny. Specifically, he calls for shrinking the Federal Reserve’s balance sheet and establishing clearer accountability between the Fed and the Treasury Department regarding fiscal and monetary matters.
Sources5
Strong governance and new ideas central to Kevin Warsh ideology
Inflation Is A Choice: Kevin Warsh On Fixing The Federal Reserve
Kevin Warsh to Lead the Fed: Policy Implications
A Bad Heir Day at the Fed
Here's what Kevin Warsh's selection as Fed chair means for the economy, markets and you
* This is not an exhaustive list of sources.