MNI: Fed Must Guard Independence By Sticking To Mission- Warsh

The best way for the Federal Reserve to safeguard its independence is for policymakers to avoid expanding the institution's role over time, including wading into policy areas that are outside its core mission, former Fed Governor Kevin Warsh, a leading contender to replace Jerome Powell as chair next year, said Friday. 

"I strongly believe in the operational independence of monetary policy as a wise political economy decision. And I believe that Fed independence is chiefly up to the Fed," Warsh said in a speech at a Group of Thirty event on the sidelines of the IMF meetings. G30 is a private group of prominent central bankers, financiers, regulators and academics.

At a time when markets have been unsettled by President Trump's verbal attacks on Powell and his calls for the central bank to lower interest rates, Warsh argued it is up to Fed officials themselves to safeguard their independence. They can do so by defining clear boundaries to their mandate and by conducting monetary policy more predictably.

"Some may believe the biggest threat to our economy comes from outsiders who seek to change the status quo," Warsh said. "I don’t agree. I believe the predominant risk come from choices made inside the four walls of our most important economic institutions."

The expansions of the Fed's remits has led to "systematic errors in the conduct of macroeconomic policy," added Warsh, a visiting fellow at the Hoover Institution. "Institutional drift has coincided with the Fed’s failure to satisfy an essential part of its statutory remit, price stability. It has also contributed to an explosion of federal spending."

His speech made no mention of Trump's tariffs or the appropriate monetary policy to deal with them.

POLICY APPROACH

On monetary policy, Warsh said policymakers wavered too frequently between their preferred inflation measures, to the detriment of public trust. 

"Frequent changes to the Fed’s metrics -- including its professed preferred measures of inflation -- are beneath the high standing of the central bank. Central bank credibility is the coin that purchases American economic strength. In Washington, a central banker can ill-afford to be anything other than a straight-shooter."

He said the ideas of data dependence and forward guidance widely adopted by Fed officials are not especially useful and might even be counterproductive. 

"We should care little about two numbers to the right of the decimal point in the latest government release. Breathlessly awaiting trailing data from stale national accounts -- subject to significant, subsequent revision -- is evidence of false precision and analytic complacency," he said. 

"Near-term forecasting is another distracting Fed preoccupation. Economists are not immune to the frailties of human nature. Once policymakers reveal their economic forecast, they can become prisoners of their own words. Fed leaders would be well-served to skip opportunities to share their latest musings."