Warsh Without Monetary Reform

The contours of a course correction for America’s central bank are sliding into focus after today’s Senate testimony by President Trump’s choice to lead the Federal Reserve, Kevin Warsh. A “policy regime change,” is how Mr. Warsh characterizes his agenda. The nominee’s remarks suggest a grasp of the central bank’s recent policy missteps, especially what he calls a “legacy of inflation” that is at the heart of what is being mooted as an affordability crisis.Peppered with questions about the surge in prices affronting Americans, Mr. Warsh laid a share of the blame at the feet of the central bank whose policies he is vowing to reform. Half of the country is “worried about affording the very basics,” Senator Andy Kim of New Jersey asserted, including expenses like “rent, gas, groceries, bills.” Mr. Warsh told Mr. Kim that “the central bank has some responsibility for the things you described.” Mr. Warsh called the Fed’s mishandling of inflation “the biggest economic policy error in 40 or 50 years,” noting that “we are still living with the remnants of it.” The pace of price inflation may have slowed since its Biden-era peak of 9.1 percent in June 2022 over the prior year. Yet Mr. Warsh noted the frustration over prices failing to retreat to their earlier levels. He stressed the pain of the “cumulative increase in prices” to “the tune of 25 percent to 35 percent.”“I understand what hard-working Americans mean when they say it is still a struggle,” Mr. Warsh explained. “That is a legacy of past policy.” While the incumbent chairman, Jerome Powell, has paid lip service to the idea that the Fed failed in a timely manner to address the Biden-era tsunami of inflation, Mr. Warsh’s candor on the Fed’s errors is refreshing. The nominee seems to grasp, too, that the bank’s missteps stem from its own attempt to foster inflation.The trouble emerged in part six years ago when, Mr. Warsh said, the “Federal Reserve changed its inflation framework.” This is the central bank’s policy making process, designed to ensure compliance with its dual mandate of ensuring stable prices and maximum employment. At the time, in August 2020, Mr. Warsh reported, “inflation was running at 1.72 percent.” This was, as these columns have reported, deemed by the central bank to be too low.“We had inflation below target,” is how Mr. Powell put it, calling it a “problem” that “the whole profession was trying to solve.” So, Mr. Warsh added, “the Fed changed its framework, rewrote in some sense, the remit” set by Congress, and the central bank “asked for a little more inflation.” Yet, the nominee averred, “they ended up with a lot more and that built a foundation for the inflation surge that happened in subsequent years which we are still living with.”It’s heartening to hear the prospective Fed chairman agree with Senator Pete Ricketts that inflation is a “silent tax,” and called it “the most regressive tax anyone in Washington could come up with.” Nor does Mr. Warsh fall prey to what he calls the view, all too popular on the left and in the economic establishment, that “inflation comes about when the economy grows too much or hard-working Americans get increases to their wages.” Instead, Mr. Warsh insisted, “inflation comes about when the government prints too much,” meaning the central bank’s emissions of paper currency, “and broadly speaking the government spends too much.” It was promising to hear Mr. Warsh reference a former Fed chairman on this head. Paraphrasing Paul Volcker, Mr. Warsh said “you would need to have a Phd from an elite institution to believe that inflation doesn’t have something to do with money.”Which brings us back, things often do, to the question of money — per se. Meaning the dollar, the value of which lurks at less than a 4,700th of a gold ounce. This was unimaginable to the monetary powers in office in the early 1970s when the Bretton Woods gold exchange standard collapsed. We don’t mind saying that we were hoping for Nominee Warsh to have addressed this crisis, which, despite all our troubles, is the most important our country faces.

Warsh Without Monetary Reform

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