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President Trump’s Fed nominee Kevin Warsh appeared before the Senate Banking Committee today and passed with flying colors. It’s the best way I can put it. It may well be a new era for the Federal Reserve as Mr. Warsh outlined his long-held views that the central bank’s remit has grown too far and too wide and must be curbed.
That its balance sheet of assets and liabilities should similarly be downsized, that it was never meant to be an overbearing central planning economic agency. And that monetary policy independence is essential. Yet it must be earned. In his testimony, Mr. Warsh said “low inflation is the Fed’s plot armor, its vital protection against slings and arrows. So, when inflation surges — as it has done in recent years — grievous harm is done to our citizens, especially to the least well-off.”
And finally, the Fed must stay in its lane. No politics. No diversity, equity, and inclusion, no climate change, no lobbying state legislatures, et cetera. Mr. Warsh challenged a number of hidebound Fed customs, such as forward guidance and constant chattering from reserve bank presidents. He indicated it’s time to look for new economic models.
Mr. Warsh is an optimistic growth guy who doesn’t believe 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 tend to favor messier meetings than some where people don’t show up with rehearsed scripts.” He added that “we can have a good family fight if the central bank has that good family fight, I think that they’re going to make better decisions. And if they happen to make mistakes, they’ll correct them sooner.” He even challenged inflation indicators suggesting that median inflation rates or trimmed mean inflation rates, where you chop off the high and low outliers, might be better than the straight up consumer price index or personal consumption expenditures deflator.
At one point he mused out loud that it’s hard to make monetary policy without ever mentioning money. Asked about his forecast he suggested the broad contours of the economy are improving but we can do better, peak inflation has come down, but it can come lower, and interest rates are a better tool than the Central Bank balance sheet.
Mr. Warsh also defended his long-run view that rapid technology advances like AI are likely to enhance productivity, reduce business costs, inflation, and ultimately bring down interest rates.
Yet he made no formal interest rate predictions. And when insulted by the far-left Democratic senator, Elizabeth Warren, that he was somehow going to be Mr. Trump’s “sock puppet,” whatever that means, he made it clear that in his interview with the president, Mr. Trump never once asked him to commit to a specific interest rate: “the president never once asked me to commit to any particular interest rate decision period, and nor would I ever agree to do so if he had. But he never did.”
I’m not surprised. Ms. Warren was her usual pain in the neck, holding up the hearing with various gibberish about Mr. Warsh meeting ethics agreements and divesting his own portfolio, of course the Wall Street Journal’s 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 and said he was in complete compliance with ethics arrangements and asset sales. As I have said, Mr. Warsh passed with flying colors. And he’ll bring a much-needed gust of fresh air to the central bank. Now let’s get him over the finish line as fast as possible.
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