Kevin Warsh on Inflation
TL;DR
Kevin Warsh views inflation as a choice resulting from excessive government spending and monetary policy, requiring a return to core mandates.
Key Points
He argued that inflation is caused when government spends too much and the money supply is too easy, creating a disparity between Wall Street and Main Street.
Warsh supported the emergency liquidity infusion during the 2008 financial crisis (QE1) under the view that the dangerous policy would be put away until the next crisis.
He advocates for shrinking the Central Bank balance sheet and encouraging the Treasury Department and the Federal Reserve to establish clear accords on responsibilities, similar to 1951.
Summary
Kevin Warsh asserts that inflation is fundamentally a choice made by policymakers, primarily driven by excessive government spending and monetary expansion, rather than being solely a result of supply shocks like pandemic disruptions or geopolitical events such as the war in Ukraine. Drawing on the teachings of Milton Friedman, he argues that if inflation becomes self-fulfilling—where higher prices beget higher prices—it is the responsibility of the Federal Reserve to control the money supply to ensure price stability. He critiques the central bank for straying from this core mandate, noting that recent inflation has resulted in the prices of goods and services increasing substantially over the last several years.
He contends that the Federal Reserve has become too entangled with fiscal policy, enabling Congress to engage in reckless spending by serving as a major purchaser of government debt through its large balance sheet. Warsh advocates for the institution to undergo reform, which includes shrinking the massive central bank balance sheet—an instrument of monetary policy he argues should be managed more quietly—and returning to a focus on core mandates, thereby encouraging fiscal discipline from other government branches. This vision requires resisting the temptation to treat normal economic times as emergencies, as this behavior, he warns, creates dangerous precedents and risks losing the consent of the governed.
Frequently Asked Questions
Kevin Warsh views inflation as a policy choice, arguing it stems from excessive government spending and an overly loose monetary policy, not solely from external factors. He believes the Federal Reserve has a core mandate to achieve price stability and must be held accountable for inflation outcomes.
While sometimes associated with a hawkish stance, Warsh has recently suggested that an AI-driven productivity boom could allow for lower interest rates without immediately sparking inflation pressures. However, his core belief that fiscal excess drives inflation remains consistent.
Kevin Warsh explicitly criticized attributing recent inflation only to supply chain issues or geopolitical events, stating that such shocks cause price changes but not sustained inflation. He asserts that inflation happens when the central bank allows those initial price changes to become self-fulfilling through monetary policy.