Former Governor Questions Fed's Independence
Kevin Warsh, a distinguished visiting fellow at the Hoover Institution and former Federal Reserve Governor, recently expressed doubts about the Federal Reserve's independence and data-dependency in an interview with CNBC's 'Squawk Box'. Warsh questioned the narrative that the Fed is apolitical/independent, data-dependent, and knows what it is doing.
Warsh's Critique of The Fed's Decision to Cut 50bps
Warsh began by questioning The Fed's decision to cut 50bps, which he believes contradicts their previous policy statements. He pointed out that The Fed has had varying theories about the cause of inflation and the measures they use, with many of these measures being significantly far from The Fed's 2% goals.
Warsh noted that The Fed had previously supported flexible average inflation targeting, but seems to have abandoned this idea without a replacement. He also highlighted that The Fed has been inconsistent in its focus, with core PCE and 'Core Services Ex Housing' being the focus at different times.
Warsh's Observations on The Fed's Inflation Theory
Warsh criticized The Fed for not having a serious theory of inflation that is both theoretical and empirical. He suggested that The Fed doesn't seem to acknowledge its role in prices, instead attributing it to external factors like wars and pandemics. This led Warsh to conclude that The Fed's 50bps rate-cut has no basis in the data.
Warsh's Warning
Warsh warned that in a dangerous world with irresponsible fiscal policy, the central bank needs to be clear about its reaction function and goals. He argued that The Fed's lack of a clear strategy makes it look like it's lurching, which is problematic.
Warsh's Critique of The Fed's Data Dependence
Warsh challenged The Fed's claim of being data-dependent, noting that the economy has gotten stronger since the early part of the summer. He suggested that if this is true, The Fed may not be as data-dependent as it claims.
Warsh's View on The Fed's Role in Politics
Warsh also touched on the issue of The Fed's role in politics. He argued that by keeping interest rates at zero for a decade and buying the bonds of the Treasury, The Fed has wandered into politics on a permanent basis. He suggested that this has encouraged a spending boom and put the country in a dangerous position.
Warsh's Critique of The Fed's Framework
Warsh argued that The Fed's framework is unanchored and that they seem to be pursuing different objectives that are often at cross-purposes. He concluded by noting that while they seem to be loosening the policy rate to provide more accommodation, they are still in some modest quantitative tightening of the balance sheet, which is tightening financial conditions.
Bottom Line
Kevin Warsh's critique of The Fed's independence, data-dependency, and decision-making raises important questions about its role and effectiveness. Do you agree with Warsh's observations and criticisms? Share your thoughts and discuss this article with your friends. Remember, you can sign up for the Daily Briefing, which is available every day at 6pm.
