Fed nominee Warsh urges new approach to inflation

· Michael West

Federal Reserve chief nominee Kevin Warsh has called for “regime change” at the US central bank that would include a new “framework” for controlling inflation and a possible overhaul of how it communicates with the public about ‌monetary policy.

In a confirmation hearing before the Senate Banking Committee that quickly hinted at major changes to come at a Warsh-led Fed, the 56-year-old lawyer and financier blamed the central bank for an inflation surge following the COVID-19 pandemic that continues to hurt US households.

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“The fatal ‌policy errors going back four or five years” are a legacy that families are still working through, Warsh said, arguing the Fed needed “a regime change in the conduct of policy. It means a new and different inflation framework.”

That shake-up includes Fed communications that “compounded” the problem, the former Fed governor argued, in a ‌signal he may want to change things like the central bank’s current use of quarterly economic and interest rate projections.

Warsh was asked about comments US President Donald Trump made shortly before the start of the hearing that he would be disappointed if Warsh did not get quick approval for rate cuts.

“Presidents tend to be for cutting rates,” Warsh said.

“President Trump expresses it quite publicly.”

“Monetary policy independence is essential,” Warsh had said in ‌a public statement delivered to ‌members of the committee, who will recommend whether ⁠to confirm him to a seat on the Fed’s Board of Governors as well as a four-year term as head of the central bank.

“I do not believe the operational independence of ​monetary policy is particularly threatened when elected officials – presidents, senators, or members of the House (of Representatives) – state their views on interest rates,” Warsh said.

“Congress tasked the Fed with the mission to ensure price stability, without excuse or equivocation, argument or anguish. Inflation is a choice, and the Fed must take responsibility for it. Low inflation is the Fed’s plot armour.”

Warsh has said rate cuts are warranted because technological changes unleashed by artificial intelligence will raise productivity, a view other central bankers say may be true over time but will not necessarily make lowering rates appropriate in the short term.

The Fed has missed its two per cent goal for more than five years, first due to the shock of the pandemic but more recently due to the influence of tariffs from Trump’s administration and the high oil prices linked to the war in the Middle East.

Trump has repeatedly clashed with Powell over monetary policy since naming him Fed chief in his first term in the White House.

Powell’s tenure ‌as head of the central bank formally ​ends on May 15 but he could conceivably remain longer in the office if Warsh’s confirmation is delayed.

At this point the timing of a committee recommendation or full Senate vote is uncertain.

The Fed has a Washington DC-based board and staff but also includes a dozen regional banks, tens of thousands of system-wide employees and duties that range from setting interest rates for the United States to managing the payments system, supervising and regulating banks, administering swap lines with foreign central banks and conducting research on anything from cryptocurrencies to rural health.

Warsh, who served as a Fed governor from 2006 to 2011, has been deeply critical of Powell’s leadership and the hearing provided an opportunity to explain in more detail what he plans to do differently.

“The Fed must stay in its lane,” Warsh ​said in his opening statement to the committee, echoing a standing conservative critique that the central bank’s work on issues like climate change or economic equity, or comments about fiscal spending, were out of bounds.

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