Who is Kevin Warsh and What Does He Think?
With Kevin Warsh seemingly ready to take over as Chairman of the Federal Reserve , everyone in the financial community and beyond owe it to themselves and their clients to answer the two-part question above.
Several tidy media treatments have done a fine job on the first part – there is little need for that here. On the second part of the question, it is clear from Warsh’s statements and writings that he has done a lot of thinking about the Fed, its purposes, its priorities, its past mistakes, and its much vaunted, if frequently exaggerated, “independence.” In much, he has thought out of the proverbial box, rare indeed in a Fed governor, much less a chairperson. Indeed, with only slight exaggeration it is possible to characterize Warsh as something of a revolutionary. How far the man might revolutionize the Fed is purely a matter of conjecture at this early stage, but he will certainly try, and he will certainly face resistance.
Federal Reserve Philosophy on Inflation and Price Stability
As befits any central banker, this would-be chairman believes that the Fed’s primary concern should be price stability. Inflation, he says, is almost always and ever the result of the combination of “excessive government spending” and Fed support of “printing too much money.” These are the only causes, he has repeatedly asserted. They caused the inflation that so shocked the nation in 2022, the lingering effects from which the economy still suffers. References to the pandemic, supply chain interruptions, labor shortages, rising wages, tariffs, among other things he dismisses as “excuses” for the Fed’s failings. Such matters create the sorts of relative price shifts that occur in every economy more or less constantly. They did not cause the inflation, which he bluntly describes as a “choice” made by the Fed to create money to support a spendthrift government.
Kevin Warsh on Quantitative Easing (QE-1 and QE-2)
In his writings, Warsh often illustrates these failed Fed “choices” with reference to the policy called quantitative easing (QE). First adopted by Fed Chairman Ben Bernanke during the financial crisis of 2008-2009, QE pours money into financial markets through direct Fed purchases of Treasury debt and mortgage bonds. It was appropriate in the emergency because the integrity of the financial system depended on getting financial liquidity to markets and financial institutions as quickly as possible. He voted for it as a Fed governor at the time. But, he argues, the injection of funds was ultimately inflationary and should have been removed from the system as the emergency passed. Instead, the Fed engaged in a second round of quantitative easing, QE-2, which he resisted, and indeed resigned as a consequence of it. Leaving the funds flows of QE-1 in the system and then engaging in QE-2 laid the groundwork for inflation, which gathered momentum, Warsh claims, in the monetary expansions during the Covid pandemic and especially in support of the 2021 federal spending surge dictated by the Consolidated Appropriations Act.
Two steps, he claims, can guard against future destructive Fed mistakes of this sort. The first is for the Fed to own up to its role in creating inflation in the first place, something he clearly doubts Jerome Powell or the rest of the Fed will ever do. The second step would steer the Fed toward an all but singular focus on price stability. Warsh acknowledges that the Humphry-Hawkins Act of 1978 extended the Fed’s remit to also pursue full employment. He nonetheless argues that this second obligation should not distract it from a focus on price stability. More than anything else, he argues, price stability will serve the employment objective by fostering the investment and innovation that lead to employment growth. He notes, for instance, that QE-2, which was supposed to help a beleaguered economy, failed to do this in two ways. It not only contributed to discouraging inflationary pressures, but because the policy had the Fed buying assets directly in financial markets, it unbalanced the economy by benefiting large wealth holders far more than the true engines of employment growth: small- and medium-sized businesses.
Regulatory Reform, Banking Supervision, and the BIS
Rather than distracting monetary policy from the goal of price stability, he recommends regulatory reform as a way to serve the economy’s growth and employment agendas. By stripping away bureaucratic rules that interfere with the business investments for expansion, innovation, and modernization, the economy will enjoy the productivity improvements that ultimately lead to increased employment and wages. Warsh acknowledges that much regulatory reform lies outside the Fed’s control, but the Fed does supervise the banks and can serve a more general regulatory reform effort by rationalizing banking regulations to facilitate lending for innovative investments. On this score, he argues against Washington’s easy acceptance of the restrictive rules promulgated by the Bank for International Settlements (BIS) in Basal, Switzerland and seems to be on the same page with newly appointed Fed Vice Chair for Supervision Michelle Bowman.
Fed “Mission Creep”
On another level, Warsh would also seek to reform the Fed’s decision-making practices. He argues against what he describes as “mission creep.” The Fed, he points out, has concerned itself with peripheral and distracting matters, questions of economic equity, inclusion, diversity, climate change, and the like. He illustrates the distracting nature of such activities by noting how in 2020, when concerns over climate change were especially fashionable, the Fed joined the Network of Central Banks and Supervisors for Greening the Financial System, but by 2025, in a different political environment, it withdrew from this body. Warsh does not deny that such matters are important, just that they distract the Fed from the very important job of price stability.
Such “mission creep,” Warsh argues further, inadvertently raises questions about Fed independence. He claims to believe strongly in Fed independence from political pressure but not as an “end in itself.” Rather he sees independence as a “means of achieving particular policy outcomes.” He argues in one op-ed that when the Fed strays from the focus set out for it by Congress—price stability— Congress, quite legitimately, might want a say. He does not go so far as economist Judy Shelton, once considered for a spot on the Fed board, that Fed independence is fundamentally anti-democratic, but he also notes that it is no violation of Fed independence to criticize the Fed, wherever that criticism comes from. If the Fed sticks to its knitting and does a good job of it, it has a better case to insist on independence than it does now.
Changing tempo, the man’s writings also advocate what is certainly an impossible reform in Washington: He advocates humility. Economics and policy making are not, he argues, a hard science, like physics. He scoffs at how several Fed chairs refer to decision making as “data driven.” The data, he insists, cannot support such practices. At best, statistics offer an indicator of reality. That weakness is evident in the countless revisions that take place years after the fact. The figures cannot support the “fine tuning” implied by such expressions as “data driven.”
In the same vein, Warsh faults the Fed for making its future policy plans public. He claims that such announcements are fundamentally misleading. They imply that the Fed can know the future environment in which it will find itself. No one can forecast like that, as the Fed’s and others’ miserable forecasting track records make clear.
What a Warsh Fed Chairmanship Could Mean for Monetary Policy
Whether a Chairman Warsh can rid the Fed of “mission creep,” focus policy making first and foremost on price stability, and streamline bank regulation to better serve the objectives of economic growth and full employment remain open questions. He can be expected to try. He may find himself co-opted by the prevailing culture at the Fed and in Washington and give up on reform. That has happened before. If he presses his agenda, he will certainly face resistance from existing Fed governors and staff members and will no doubt suffer dissentions and see resignations. If the past is any guide, he will be remarkable if he can institute even a small part of his desired agenda. Either way, it will be a bumpy ride at the Fed and a fun-filled one for observers.
