The original and primary mandate for the Fed is financial system stability. Shrinking the Fed balance sheet creates instability through insufficient liquidity. The sycophantic and pro-bank Bowman will weaken counterparty credit standards. Once they've created the next crisis, I'm sure they'll slash rates to zero and buy every asset that Trump tells them to. The rest of the world will get alligator arms for US assets.
Thank you for spelling out the reason for post covid inflation. I also think it would have been really difficult for the fed to control inflation during the supply chain disruptions caused by global pandemic. I think Warsh might not be looking at all the data because he's not an economist. Theres a reason we want the nerds in charge of these things.
Appreciate the nuanced take on Warsh's contradictory policy stances. The part about him wanting both lower rates and quantitative tightening is telling, they kinda cancel each other out on the inflation front. His claim that AI will boost productivity by 1 percentage point seems way too optimistic given current data, feels more like hopeful projection than rigorous analysis ofwhere we actually are.
Warsh states “So long as Mr. Powell’s Fed hasn’t suffered from a loss of inflation-fighting credibility, the effect of a 10% tariff [on inflation] shouldn’t be statistically significant.”
Again, half right. The effect of tariffs on infltion run _through_ the Fed. The Fed has to decide how much additional inflation (beyond what it woud have chosen w/o the tariffs) it should inflate to facilitate the adjustment of relative prices to the increase in tariffs on a wide rance of imported goods. "Not signiicant" is a policy judgement.
Warsh: “Second, inflation is a choice, and the Fed’s track record under Chair Jerome Powell is one of unwise choices. The Fed should re-examine its great mistakes that led to the great inflation”.
Warsh is correct that inflation is a choice. He is wrong that the Fed's choise to inflate and achieved the shortest recession on record was an error.
Not harsh enough. He has a conflict of interest via his father-in-law that could influence his ideas and focus as Fed Chair. The chair is not a political favor to be doled out, it is one of a few positions that require absolute competence. He may be competent, but he’s tainted. We can’t have that.
It is somwhat concerning that Warsh wants both to reduce the Fed's balance sheet and reduce interest rates, but more concerning is that he woud have either as an _objective._ They are instruments to achieve the Fed's inflation target. The hunter's objective is not to aim the gun but to hit the target. More at:
I'd express the valid concern with "unanchoring" differently.
The Fed inflates -- whether at the normal average rate target or at some temporarily higher target -- to faciliate the adjustment of relative prices when some nominal prices are sticky downwards. An increse in the average of all prices ("inflation") allows relative price adjustment to occur without any market involving sticky downward prices failing to clear and those resources becoming unemployed.
"Unanchoring" means that some prices become downwardly sticky not just in nonimal terms but in real terms. This implies that the Fed needs to inflate MORE to prevent market clearing/unemployed resources failure. Unanchoring, like tariffs, or deportaions or budge defciits do not diretly affect inflation (except on time scales too short for the Fed to react). Inflation, defalation, unemployment, employment all run through the Fed.
BTW, the run up in TIPS inflation expectations over the last month are hardly evidence of unanchoring. They have been higher several times in the last few years. On this I agree 100% with NN. :)
Warsh believes “AI will be a significant disinflationary force, increasing productivity and bolstering American competitiveness.”
I hope he is right, but it has no significance for monetary policy. It is not a reason to aim for higher or lower inflation. It would concerm me only if HE thinks it is a reason for higher or lower inflation.
The original and primary mandate for the Fed is financial system stability. Shrinking the Fed balance sheet creates instability through insufficient liquidity. The sycophantic and pro-bank Bowman will weaken counterparty credit standards. Once they've created the next crisis, I'm sure they'll slash rates to zero and buy every asset that Trump tells them to. The rest of the world will get alligator arms for US assets.
Thank you for spelling out the reason for post covid inflation. I also think it would have been really difficult for the fed to control inflation during the supply chain disruptions caused by global pandemic. I think Warsh might not be looking at all the data because he's not an economist. Theres a reason we want the nerds in charge of these things.
Appreciate the nuanced take on Warsh's contradictory policy stances. The part about him wanting both lower rates and quantitative tightening is telling, they kinda cancel each other out on the inflation front. His claim that AI will boost productivity by 1 percentage point seems way too optimistic given current data, feels more like hopeful projection than rigorous analysis ofwhere we actually are.
Warsh states “So long as Mr. Powell’s Fed hasn’t suffered from a loss of inflation-fighting credibility, the effect of a 10% tariff [on inflation] shouldn’t be statistically significant.”
Again, half right. The effect of tariffs on infltion run _through_ the Fed. The Fed has to decide how much additional inflation (beyond what it woud have chosen w/o the tariffs) it should inflate to facilitate the adjustment of relative prices to the increase in tariffs on a wide rance of imported goods. "Not signiicant" is a policy judgement.
Warsh: “Second, inflation is a choice, and the Fed’s track record under Chair Jerome Powell is one of unwise choices. The Fed should re-examine its great mistakes that led to the great inflation”.
Warsh is correct that inflation is a choice. He is wrong that the Fed's choise to inflate and achieved the shortest recession on record was an error.
Not harsh enough. He has a conflict of interest via his father-in-law that could influence his ideas and focus as Fed Chair. The chair is not a political favor to be doled out, it is one of a few positions that require absolute competence. He may be competent, but he’s tainted. We can’t have that.
It is somwhat concerning that Warsh wants both to reduce the Fed's balance sheet and reduce interest rates, but more concerning is that he woud have either as an _objective._ They are instruments to achieve the Fed's inflation target. The hunter's objective is not to aim the gun but to hit the target. More at:
https://thomaslhutcheson.substack.com/p/the-financial-times-on-kevin-warsh
I'd express the valid concern with "unanchoring" differently.
The Fed inflates -- whether at the normal average rate target or at some temporarily higher target -- to faciliate the adjustment of relative prices when some nominal prices are sticky downwards. An increse in the average of all prices ("inflation") allows relative price adjustment to occur without any market involving sticky downward prices failing to clear and those resources becoming unemployed.
"Unanchoring" means that some prices become downwardly sticky not just in nonimal terms but in real terms. This implies that the Fed needs to inflate MORE to prevent market clearing/unemployed resources failure. Unanchoring, like tariffs, or deportaions or budge defciits do not diretly affect inflation (except on time scales too short for the Fed to react). Inflation, defalation, unemployment, employment all run through the Fed.
BTW, the run up in TIPS inflation expectations over the last month are hardly evidence of unanchoring. They have been higher several times in the last few years. On this I agree 100% with NN. :)
Warsh believes “AI will be a significant disinflationary force, increasing productivity and bolstering American competitiveness.”
I hope he is right, but it has no significance for monetary policy. It is not a reason to aim for higher or lower inflation. It would concerm me only if HE thinks it is a reason for higher or lower inflation.
I would argue not concerned enough….we have no idea what he promised Trump to get the job.