Warsh might yet be a good Fed chair

{"text":[[{"start":5.6,"text":"Is it possible that Kevin Warsh will prove to be the central banker the US and the world needs? After his speech at the Jackson Hole Symposium, I am less pessimistic about the prospect than before. Difficult choices — difficult intellectually and politically — lie ahead. But his speech “In our time” was both clear and sensible — clear on the objectives of policy and sensible on how the Fed should conduct itself. This is cheering. It could also prove of great future importance."}],[{"start":37.42,"text":"As I have previously noted, Warsh has been a confusing figure. In the past he has presented himself as an inflation hawk, notably with his wildly premature concern over the dangers, notably to inflation, of the monetary policies adopted after the global financial crisis. Indeed, he already expressed this concern in March 2010. More recently, however, prior to his appointment as chairman of the Federal Reserve by Donald Trump, he seemed to be bending to political pressure to be optimistic about prospects for productivity and inflation. The fear was that he was a political weathervane, whose economics depended on who was in power."}],[{"start":null,"text":"

"}],[{"start":76.56,"text":"Yet since Warsh became chairman, things have been looking up a little. True, as my colleague Chris Giles noted on August 11, Warsh has largely failed to engage substantively on the state of the US economy. Yet the Fed under him has also announced five task forces to assess its communications, balance-sheet management, the data it uses, the prospects for productivity and its policy frameworks, all under reputable figures. My hope is that this was a clever way to gain credibility for battles ahead."}],[{"start":null,"text":""}],[{"start":107.16,"text":"Now comes this Jackson Hole speech. It had three main sections: a rumination on the implications of AI for the economy; a critique of forward guidance; and a restatement of the Fed’s core objectives. All are important."}],[{"start":120.56,"text":"The need to assess the implications of AI for the economy and so the conduct of monetary policy is clearly vital. The big need on this is to understand the scale and nature of the uncertainty."}],[{"start":null,"text":""}],[{"start":132.96,"text":"Uncertainty is also self-evidently the biggest problem with forward guidance. It is not that we are uncertain only about how monetary policy will affect the economy (although we are). It goes far deeper than that. As John Kay and Mervyn King argued in their splendid book, Radical Uncertainty, there is so much we don’t know. Nobody can look at our financial and monetary systems, domestic and international politics, climate change, the Covid-19 pandemic’s sudden onset and technological changes over the past few decades without realising just how much uncertainty there is. Forward guidance is fine if nothing changes very much. But then it does — again and again and again."}],[{"start":172.32,"text":"As Warsh said, forward guidance was introduced as a regular practice after the financial crisis. This was justifiable when there was a single overwhelming concern that was, plausibly, going to last for a long time, as indeed it did. Yet it is worth noting how useless a form of “forward guidance” had been just before the crisis, when accuracy was desperately needed. The then Fed chairman, Ben Bernanke, a highly qualified economist, stated in March 2007 that “At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.” The statement seemed reasonable at the time. But it was dead wrong."}],[{"start":null,"text":""}],[{"start":211.6,"text":"Another area in which I believe conventional economics has been proved misleading is, as Warsh indicated in his speech, in deciding that the quantity of money is irrelevant. The post-pandemic rise in the price level, after the huge monetary expansion of 2020, is, as I have previously argued, an indication that this view is quite mistaken."}],[{"start":230.48,"text":"The point then is the pervasive uncertainty about the economy. An economy is not a machine, to be manipulated by wise technocrats in accordance with predictable rules. In addition, forward guidance creates a “hall-of-mirrors”: the central bank sees in markets not independent judgments but an image of its own statements, as participants shift from investing in their own judgment to following the Fed’s forecasts of what it will do. Even providing a reaction function goes beyond what policymakers are able to do, above all when big shocks hit."}],[{"start":null,"text":""}],[{"start":258.68,"text":"This is not a recipe for inactivity. On the contrary, as Warsh notes, there are a few key principles. These include having accurate and up-to-date data; awareness that low inflation is a necessary condition for low unemployment; reliance on short-term interest rates as the main policy tool; and, above all, as he says, that “the Fed’s price-stability objective of 2 per cent . . . is a firm, fixed target.” Delivery on the target is vital. The best way to do this is to show why the central bank judges its interest rate policy to be the right one to deliver its objective, given how it understands the economy at the time."}],[{"start":297.44,"text":"This is not what the US president believes. On September 4 2026, on Truth Social, Trump ordered: “LOWER THE RATE [of interest] OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT.” There is no need to analyse the economic (il)logic here. The main point is his belief that “A STRONG COUNTRY MEANS A LOWER INTEREST RATE - IT’S A BETTER CREDIT . . . Very simple!” Inflation is, in his mind, altogether irrelevant."}],[{"start":null,"text":""}],[{"start":322.36,"text":"That must not be true for Warsh. He must deliver on his target, despite high fiscal deficits and debt, structurally higher real and nominal interest rates than in the 2010s, and technological change. In so doing, he will need to display as much clarity about the economy as he can. But by far the biggest requirement is courage: he must strive to do the Fed’s duty and so deliver low inflation, whatever the political pressures upon him."}],[{"start":347.88,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1789036378_9026.mp3"}