MNI POLICY: Warsh Could Reshape Fed On Rates, Communication 

Former Federal Reserve Governor Kevin Warsh did not comment directly on the outlook for monetary policy in his IMF speech last week, but he offered plenty of clues into the kind of chair he would be if President Donald Trump appoints him to replace Jerome Powell next year.

Most prominently, Warsh expressed frustration with both the frequency of Fed communications and its short-term focus, indicating he would impose a greater level of circumspection of the Federal Open Market Committee that includes fewer central bank speeches and less near-term forecasting. 

“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,” Warsh said. (See MNI: Fed Must Guard Independence By Sticking To Mission- Warsh)

That opens the possibility of jettisoning the Summary of Economic Projections. While adopting the SEP was a committee decision, a new chair could easily deemphasize the so-called dot-plot by downplaying its relevance, including by not submitting a dot of their own. The SEP was first launched in 2012, shortly after Warsh left the board. 

DUAL MANDATE 

While he did not opine directly on the economic outlook, Warsh provided some insight into how he would weigh the Fed’s dual mandate of stable prices and maximum employment. 

On the inflation side, he was highly critical of the Fed for relying on DSGE models and misjudging the effects of fiscal policy on price pressures.

He suggested the central bank has been guilty of faddishly wavering between preferred inflation measures du jour in a way that undermines its mission. “Frequent changes to the Fed’s metrics-- including its professed preferred measures of inflation-- are beneath the high standing of the central bank.”

He also took a negative view of the Fed’s redefinition of maximum employment as a “broad and inclusive goal” back in its 2020 framework review. What was intended as a way to boost employment for certain underprivileged groups likely contributed to an inflation surge that hurt those same groups the most, Warsh said.  

The ex-governor, who served from 2006 to 2011, also critiqued the Fed’s own balance sheet expansion as having enabled the government’s fiscal profligacy. “It’s no longer obvious whether monetary policy is downstream or upstream from fiscal policy. Irresponsibility has a way of running in both directions.”