Kevin Warsh’s Promising Start as Fed Chair

It is true that one swallow does not make a summer. However, Kevin Warsh’s impressive performance yesterday at his first Federal Reserve Open Market Committee (FOMC) meeting as the Fed’s new Chair offers hope of a successful four years for the Fed under his new leadership. Right out of the gates, Mr. Warsh has demonstrated that notwithstanding Trump’s relentless pressure on the Fed for lower interest rates, he plans to use interest rate policy as needed to meet the Fed’s inflation target. He is doing so after five years of inflation having remained above the Fed’s 2 percent inflation target. He has also indicated that he intends to undertake much-needed reform of the Fed in a strictly professional manner and that he intends to take a humbler approach than his predecessor in forecasting the course of the economy.  At the same time, he has demonstrated his skill as an effective communicator and as one who is able to build consensus on the Fed’s board. In the wake of the recent 20 percent decline in international oil prices following the US-Iran agreement to reopen the Strait of Hormuz, it would have been all too easy for Mr. Warsh to mollify Trump with the prospect of interest rate cuts down the road. Instead, Mr. Warsh went in the opposite direction by emphasizing his commitment to meeting the Fed’s inflation target. When asked whether monetary policy could be characterized as tight, he refreshingly noted that he could not say so when one looked at the buoyant state of the financial markets. He also did not rule out the possibility of the need for an interest rate hike before year-end.   In another sign that he intended to maintain the Fed’s independence, while Mr. Warsh himself did not offer his own interest rate forecast, he allowed other FOMC members to provide their interest rate forecasts. He did so even though nine of the twelve FOMC members expected higher interest rates by the end of the year. It is also reassuring that after the many dissents at the previous FOMC meeting, Mr. Warsh was able to get unanimous support for the FOMC’s latest interest rate decision without any dissents. At a time of great economic change as underlined by the Artificial Intelligence revolution and of considerable geopolitical uncertainty as underlined by the Iranian conflict, it is refreshing that Mr. Warsh recognizes the limits of economic forecasting. He also recognizes the need to seek more current economic data points than is currently being provided by the official statistics that come with a considerable lag. This is pointing him in the direction of suspending the Fed’s offering economic forecasts to the markets. It is also pointing him in the direction of stopping the practice of offering the market forward guidance to its interest rate decisions. We also have to welcome both the scope of the economic reforms to the Fed that Mr. Warsh is envisaging and the professional way about which he intends to go about formulating those reforms. At his press conference, Mr. Warsh indicated that he would be forming committees consisting of the best experts both within and outside the Fed to evaluate the needed reforms in the following five areas: Fed Communications, the Fed Balance sheet, Data Sources, Productivity and Jobs, and Inflation Frameworks. He expected that those committees would come up with their recommendations for consideration in the next few months. In short, it would seem that Mr. Warsh has got off to an excellent start in establishing his credibility as the Fed’s new Chair committed to the Fed’s independence and to its inflation target. We have to hope that Mr. Warsh succeeds in maintaining that credibility and in resisting Trump’s inevitable calls for inappropriate interest rate cuts. The post Kevin Warsh’s Promising Start as Fed Chair appeared first on American Enterprise Institute - AEI .