Fed Chair nominee Warsh has mixed signals in Senate hearing

Kevin Warsh’s confirmation hearing for Federal Reserve Chair in the Senate today prompted questions about future Fed policies. While his testimony had promising signals, several areas of concern remain unresolved, say CEI experts.

Statement by Steve Swedberg, CEI policy analyst:

“Warsh’s focus on price stability is important, because stable prices are essential for economic confidence and long-term growth. However, Warsh continues to endorse a competing goal: maximum employment. This raises concerns about how consistently price stability would be prioritized under a Warsh Fed when it conflicts with employment objectives.

“While Warsh did not give firm answers on future interest rate decisions, his reluctance to do so is linked in part to his rightful opposition to forward guidance. Forward guidance is when the Federal Reserve signals its expected path for interest rates in advance, based on economic forecasts that can often be uncertain. By rejecting this approach, Warsh avoids making promises about future policy that may not hold. CEI has likewise criticized forward guidance as an unreliable and often misleading policy tool.

“Another bone of contention is the Federal Reserve’s balance sheet. Warsh said the Fed should not make large-scale purchases of government bonds and mortgage-backed securities, a policy often called quantitative easing, except in emergencies. This would mark a shift from recent Fed practice and represents a view similar to CEI analysis calling for a smaller balance sheet.”

Statement by Ryan Young, CEI senior economist:

“Federal Reserve independence is the number one issue facing the next Federal Reserve Chair. Whatever interest decisions the Fed makes are less important than who makes those decisions. In nearly every country where politicians make monetary policy, the result has been high inflation, from Argentina to Turkey to Venezuela. Warsh has the right resume for a Fed Chair, but will he stand up to presidential interference? While he said the right things in today’s hearing, the real test will not occur until after he takes office.”

Statement by John Berlau, CEI director of finance policy:

“In response to excellent questioning from Sen. Bernie Moreno (R-OH), Fed Chair nominee Kevin Warsh rightly called a Fed-issued central bank digital currency ‘a bad policy choice’ and said that the Fed had no power to issue one.  He added that he would not have the Fed move toward a CBDC if this matter were ‘within the powers of the chairman.’

“Warsh’s answers were reassuring on policy – as a CBDC would have destructive effects from privacy breaches to inflationary pressure – but Senators should note that Warsh advocated for a Fed-issued CBDC for many years and as late as 2022. They should ask him in writing or in a future meeting what made him change his mind.

“In answering a separate question from Sen. Jim Banks (R-IN), Warsh also rightly acknowledged a major problem with FedNow – the Fed’s incursion into the marketplace for private payment system – but didn’t specify specific problems or solutions. He referred to FedNow as ‘FedYesterday,’ seemingly criticizing its outdated technology. Senators should press Warsh to commit to ending FedNow and lifting regulatory barrier to private payment systems that would better serve consumers and businesses.”