Front entrance of the Marriner S. Eccles Federal Reserve Board Building, built in 1937.
The Senate has confirmed Kevin Warsh as the new Chairman of the Federal Reserve for the next four years and for a 14-year term as a governor.
You know that my preference is to end the Fed. The central bank has a 100% error rate. But as long as it exists, aiming to give the Fed the best leadership possible is important.
No chairman will be perfect, and every chairman will be forced to make compromises because the Federal Reserve is built on a contradictory mandate that sometimes gives policymakers no good options. But during the Financial Crisis, Warsh was one of the few Fed officials who stood up to suggest restraint at a time when the bank’s leadership seemed hell-bent on breaking all the rules.
When the Fed began its second round of quantitative easing (QEII), Warsh criticized the move, writing in an op-ed in The Wall Street Journal at the time (November 2010):
The Fed’s increased presence in the market for long-term Treasury securities poses nontrivial risks that bear watching. The prices assigned to Treasury securities—the risk-free rate—are the foundation from which the price of virtually every asset in the world is calculated. As the Fed’s balance sheet expands, it becomes more of a price maker than a price taker in the Treasury market. If market participants come to doubt these prices—or their reliance on these prices proves fleeting—risk premiums across asset classes and geographies could move unexpectedly.
Later in 2015, Warsh expanded his criticisms of QE during a Brookings discussion in 2015. Watch:
I noted Warsh’s fracturing relationship with the Bernanke-run Fed in 2009, writing:
There are two paths to higher interest rates: infla tion, or a painful stew of Fed tightening and a flood of Treasury issuance. I’d put my money on higher inflation, but recent comments from the Fed indicate there is an outside chance Bernanke and company could surprise us. The Fed is likely just talking a big game to keep inflation expectations contained, but in a recent Wall Street Journal editorial, Fed governor Kevin Warsh said that monetary stimulus may have to be reversed with the same fervor that accompanied its implementation during the panic. His editorial was followed by hawkish comments from the president of the Richmond Fed about pre emptive rate increases. I don’t think Bernanke and the Fed have the will to take the necessary steps to prevent an inflation spiral, but we shall see.
The more likely path to higher interest rates is through rising inflation. When should we expect inflation to accelerate? We are already seeing it. Goods and services inflation isn’t rising yet, but asset price inflation is running rampant. We’ve blown right through fair value in stocks, credit spreads in many sectors have dropped back to pre recession levels even though the risk of default is now much greater than prior to the recession, and commodities and gold prices are rising. The Fed has driven interest rates down to zero, has printed money with abandon, and is supporting securitiza tion markets with an alphabet soup of programs.
Skepticism is a strong quality in a Federal Reserve Chairman. Hopefully, Warsh will continue his skepticism of the Fed’s expanded role during his chairmanship.