Although he’s not as unknown as former Fed Chairman Alan Greenspan, new Fed chief Kevin Warsh has settled on a few phrases that are notable for their repetition and lack of clarity.
In five public appearances, starting with his nomination hearing in April and ending with his first press conference, a roundtable in Portugal, and two congressional testimony, Mr. Warsh has used the phrase “family battles” 13 times, gone back to “first principles” 11 times, and for the Fed, “inflation is a choice” six times.
But determining what these phrases mean for monetary policy is harder than counting their usage. But for a chairman who has decided to speak more sparingly than his predecessors, understanding his choice of words is crucial.
CNBC asked five close observers of the Fed for their thoughts on what these three phrases mean to them.
“Good family fight”
Dan Greenhouse, Strategist, Solus Alternative Asset Management:
“If Chairman Warsh can encourage more open debate around policy and create an environment in which prevailing assumptions can be challenged rather than simply accepted, that should ultimately lead to better policy decisions. The benefits lie less in changing the outcome of individual meetings and more in improving the quality of the decision-making process over time.”
Loretta Mester, former president of the Cleveland Fed:
“Ensuring an environment at[Federal Open Market Committee]meetings allows all views and arguments to be heard. This is an atmosphere that was already there when I was on the FOMC. There’s actually 19 people around the table, so there has to be some sort of order, otherwise you’re probably only going to hear the loudest voice in the room, and it’s going to be hard to jump on, so fewer opinions will actually be expressed. ”
Claudia Sahm, chief economist at New Century Advisors, said:
“FOMC meetings tend to be highly scripted proceedings, with prepared remarks read aloud and conversation limited. Mr. Warsh wants more lively interaction and is more comfortable with that style. This format is unlikely to influence policy decisions, and the 19 participants are a large group for free conversation.”
Mark Spindel, Fed author and chief investment officer at Potomac River Capital, said:
“For Kevin, this is his maxim for the natural debates that occur within the FOMC and the Board of Directors. It implies an obvious disagreement, but like anything else, ‘family disputes’ are best kept to the family members and not revealed too much to the public.” I think it’s the second part that my colleagues on the committee (and market participants) take issue with, and that the above premise doesn’t hold true. Committee members are clearly willing to express their disagreements publicly, or at least express their opinions more. More openly than[Chairman Warsh]it is also a way of escaping responsibility from external pressures (presidential, Congressional, market).”
Michael Feroli, chief U.S. economist at JPMorgan, said:
“I think the family quarrel is an attempt by him to be popular, but it’s not a departure from the tradition under President[Ben]Bernanke of welcoming dissenting views[publicly].”
“First principle”
Spindel:
“This is ambiguous enough to mean what Mr. Warsh wants to mean, but from the context it seems to be the basis of the decision-making and structural reforms he is expressing.” He said his colleagues in the central bank leadership share a “willingness to return to first principles.” I think his reintroduction of monetary aggregates, his cutesy line that “monetary policy should have something to do with money,” has been cut from the text. Same general fabric as “first principles”. Sadly, economic forecasting (the Phillips curve), a mainstay of the science of monetary policy and other forms of monetary policy, doesn’t even seem to work with Warsh’s first principles-based approach. He has been quick to blame (Jerome) Powell and his ilk for their yearly failures on inflation. Low interest rates, balance sheets, failure to tighten early, FAIT, all of which were (for Warsh) deviations from “first principles.” ”
Therm:
“‘First Principles’ is a code for ‘questioning everything.'” Mr. Warsh has repeatedly said he wants “systemic change” at the Fed, and questioning the fundamental assumptions of how monetary policy is conducted fits that agenda. I am skeptical that Mr. Warsh can rewrite first principles. It is not enough to show that an assumption is flawed. We need to offer better alternatives. Even if Mr. Warsh leads the task force, it will likely fall short in terms of new first principles: no changes to the monetary policy regime, but incremental improvements to the way policy is done. ”
Master:
“Rethink how the Fed can achieve its twin mandate goals of price stability and maximum employment, without bias or assumptions or eliminating approaches because they may differ from current approaches. First, think about what the best approaches are for communications, inflation and labor market measurements, balance sheet and operating frameworks, and data sources. Then consider how to transition to these new approaches.”
“Be aware that committees tend to be reluctant to make major changes. Consider how many times statements have been changed by just one or two words. This rethinking from first principles allows the committee to consider new approaches rather than small adjustments. The committee should then consider how best to move there.”
Feroli:
“The ‘first principles’ line feels like it’s in the same spirit as his statement that PhDs from elite institutions don’t put money in monetary policy. Both seem to suggest that the institution is distracting academic-driven people from the Fed’s focus on some basic economic principles. (Mr. Powell didn’t have a PhD either, but he certainly didn’t seem too defensive about it!).”
Green house:
“A return to first principles could have significant implications for policymaking: What is the Fed’s mission and how should it fulfill that mission? Whether or not you agree with this more ‘out-of-the-box’ approach, this seems to be the direction Mr. Warsh wants to take the Fed. It means the Fed’s role beyond monetary policy is more limited. This includes greater skepticism about the Fed’s involvement in areas such as regulatory policy and climate-related issues.More broadly, it suggests a more limited role for the Fed.We need to reassess how much the Fed’s role has expanded since the global financial crisis and whether it has gone too far.
“Inflation is a choice, and the Fed must take responsibility for it.”
Master:
“This brings to mind the words of Milton Friedman: “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a rapid increase in the quantity of money rather than output.”
“Over the long term, to achieve price stability, the Fed must ensure that aggregate demand does not grow faster than aggregate supply, otherwise price pressures and sustained inflation will occur.”
“Be aware that in the short term, temporary disruptions in supply may cause prices for certain goods and services to rise.The Fed wants to determine that supply disruptions should be over by the time monetary policy actions impact the economy. However, if the supply disruption lasts longer, or if a series of multiple disruptions occur (as is the case now and after the pandemic), the Fed will need to make sure that monetary policy is sufficiently restrictive to match supply or inflation will rise sustainably. ”
Therm:
“‘Inflation is a choice’ is a nod to Warsh’s mentor, Milton Friedman, who said, ‘Inflation is always and everywhere a monetary phenomenon.’ The Fed’s framework already includes a version of this. “Long-term inflation rates are primarily determined by monetary policy.” Mr. Warsh is restating what the Fed has said for years, but omitting the time period, and that omission is problematic. In the short term, supply shocks such as energy disruptions and tariffs are possible. Mr. Warsh’s statement that inflation will move regardless of what the Fed does is unlikely to change the views of other Fed officials on monetary policy, but it could confuse the public about what the Fed can do.”
Green house:
“Taken to its logical conclusion, this suggests that the Fed is reluctant to attribute long-term inflation overshoots primarily to exogenous factors such as tariffs, fiscal stimulus, and supply shocks. Chairman Warsh’s message is essentially that ‘we are responsible.’ As a result, Chairman Warsh will be less open to explanations for persistently high inflation that do not acknowledge the Fed’s own role.”In his view, the Fed may not be responsible,” but it is ultimately responsible for ensuring that those shocks do not result in sustained inflation.
Feroli:
“I think his phrase, “Inflation is a choice, and the Fed must take responsibility for it,” sits oddly aside from one of his other catchphrases, “I don’t think we have a cruel choice.”” Not many people would have a problem with his first catchphrase, since it is a pillar of modern financial economics that inflation is a choice that is under the control of central banks in the long run. (However, how long in the long run is debatable). But the idea that there is no short-term tradeoff between growth and inflation begs the question of why the Fed would choose inflation. The economic argument for central bank independence is based on the idea that politically motivated central banks may be tempted to exploit short-term trade-offs to enrich the economy at the expense of price stability in the long run.
Spindel:
“This is another phrase that can mean whatever Mr. Warsh wants it to mean. It is perfectly consistent with his (and the Committee’s) reassertion of its inflation mandate in the first FOMC statement under the KW administration: “The Committee will achieve price stability.” But when grilled by Sen. John Kennedy (R-Louis.), Warsh struggled to explain exactly what he would do about it. Ultimately, he will solve the problem and higher interest rates may be on the way soon. He criticized his predecessor for suggesting he was satisfied with rising inflation. I agree with Chairman Warsh’s opinion that the Fed should take responsibility. At its simplest, the Fed sets the price of money, and when money is too cheap, the Fed must act. ”
