There is a certain “truthiness”, as the comedian Stephen Colbert might put it, to the idea that we are about to have a get-real conversation about monetary policy in the US. Despite constantly calling for lower interest rates, President Donald Trump has nominated as the next Federal Reserve chair Kevin Warsh, who announced a little over two months ago that “money on Wall Street is too easy, and credit on Main Street is too tight”. Amen.
He says he wants to trim the Fed’s massive balance sheet, which could raise longer-term interest rates. Of course, Warsh is also a savvy political operator who seems ready to do Trump’s bidding. He has said he believes America might be on the cusp of an AI-related productivity boom that will dramatically boost workers’ output, allowing the Fed to cut rates without stoking higher prices. Nobody knows whether that is true yet.
But Warsh is “truthily” right about one thing. America has become dangerously reliant on the “Fed put”. By counting on the Fed to intervene whenever things get rough, Washington policymakers have punted on tough fiscal policy decisions and relied on easy money and low rates to bolster markets and GDP growth for decades now.