As kids, our favorite town cop let us play wiffle ball and tennis in the streets late at night after the offices closed. All was good until there was a new cop who made us stay on the sidewalks and obey laws we thought weren’t for us. I have a feeling that’s how Federal Reserve employees feel about their new sheriff: less fun and publicity… more work.
The June Federal Reserve meeting, which wrapped up a few days ago, was led by the new Fed Chairman, Kevin Warsh. Warsh began his meeting at the same time the announcement was made that longtime Fed Chair Alan Greenspan had passed. This was interesting because Warsh is trying to usher the Fed back to acting as it did during the Greenspan era.
Warsh pointed out that the policymakers would keep their focus on inflation and restated the Fed’s 2% inflation target. This led investors to interpret it as a hawkish (higher rates) shift. This shouldn’t surprise anyone who was paying attention to his recent Senate confirmation, where he said, “Once you let inflation take hold in the economy, it’s more expensive and harder to bring it down.” Warsh is on record saying it was a “fatal policy error” when the Fed was too slow to raise rates, and that the U.S. economy is still struggling. Warsh pointed out that the Fed would utilize both of its monetary policy tools, the Fed Funds interest rate (overnight rate between banks) and the Fed’s Balance Sheet, to reach the inflation rate goal and lead the economy to a high level of employment.
Warsh used his first press conference as chairman of the Fed to lay out his plan to usher in reforms by year-end. Most analysts agree with him that the Fed has failed to manage inflation post-COVID.
Possible Federal Reserve Reforms Under Chairman Warsh
To change this course and enact the needed reforms, Warsh announced five new task forces to examine the organization’s communication, balance sheet, reliance on existing data sources, productivity and jobs, and inflation frameworks.
- Warsh believes the Fed communications need to take a backseat to data. He would prefer that investors react to data rather than to Fed speakers discussing what policymakers might or might not do. He proved this by not providing a Fed projection Dot Plot, as Greenspan did. It seems that the new Fed chairman does not want to be a Fed Chair celebrity.
- The chairman believes the Fed’s Balance Sheet Policy needs to be shrunk. It’s crazy to think that its balance sheet is still at $6 trillion compared to less than $1 trillion before the Global Financial Crisis and $4 billion before Covid. The Fed’s tools are like a shotgun with a chamber full of its old shells; to be useful, it must be emptied so it can be loaded again for the next crisis. Warsh intends to shrink the Fed’s Balance Sheet and be ready for the economy’s next crisis.
- Warsh wants the Fed’s data sources to be modernized. He feels the current method of data collection is outdated and that the government agencies that produce it have not properly adapted to the ever-changing U.S. economy.
- He is challenging the Fed operations to do a better job of measuring productivity and jobs. The current methods have not changed in decades, even though the economy has experienced a technological revolution.
- Warsh wants to re-examine the Fed’s inflation processes. He means to push the Fed to reevaluate how it measures inflation and diagnose its underlying causes.
Analysts don’t expect Warsh to quickly raise or cut the Fed Funds. He is known as a patient and thoughtful leader who will wait for solid data and a sound solution before acting. As in the Greenspan era, we won’t see him in many interviews, and the Fed will be more behind the scenes. A Fed with fewer newsmakers and more humble public servants. I wouldn’t be surprised by a small rate increase by the end of the Fed’s September meeting, but I don’t think it will be a monumental event as in the past. I think this new guy might work out fine.
Our favorite town cop would sit in his truck watching us play and even let us climb on top of the library and bank to retrieve an errant ball from time to time. It was great fun, but looking back as an adult, I wonder what would have happened if we had damaged something on those buildings. Maybe a little more supervision back in the day would have been good, and might be good now for the Fed.
Have a blessed week.
Richard Baker
This article was written by humans for humans because AI doesn’t have this quality of sarcasm.
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