If confirmed as chair of the Federal Reserve, is Kevin Warsh going to be an inflation hawk or Donald Trump’s poodle? His repeated statements on monetary policy and the broader obligations of the Fed suggest the former. But his more recent statements on the inflation outlook and the fact that Trump chose him very much suggest the latter. More broadly, is he a man of conviction and judgment or is he a weathervane, blowing with the wind from the Republican side of politics and so in favour of loose monetary policy when Republicans are in power and of tight money when the Democrats are?
Warsh’s words indicate that he is very much the “hard money” central banker. Notably, in a speech to the Shadow Open Market Committee in New York given in March 2010, when the US economy was, remember, still struggling with the deeply recessionary aftermath of the 2008 financial crisis, he had already started worrying about Fed credibility.
He made four main points. First, Fed independence applies only to monetary policy, not “regulatory policy, consumer protection or other responsibilities granted to the Federal Reserve”. Second, the “Fed, as first-responder, must strongly resist the temptation to be the ultimate rescuer”. Third, “governments may be tempted to influence the central bank to keep monetary policy looser longer to finance the debt and stimulate activity”. But the “only popularity central bankers should seek, if at all, is in the history books”. Last, “central banks, here and abroad, have worked for decades to get inflation down to levels consistent with price stability. We should not risk these hard-won gains.”