I think Kevin Warsh will do everything he possibly can to avoid raising rates.
Contrary to most (all?) the FOMC summaries I read on Wednesday and Thursday, I don’t think there was anything inherently hawkish about his performance at this week’s press conference.
The SEP inflation projections were hawkish and so were the dots. But Warsh didn’t submit a dot. And by jettisoning forward guidance altogether in the statement, he avoided having to co-sign a policy pronouncement which conveyed a shift in the Committee’s thinking on the balance of risks around the dual mandate. Sure, the dots conveyed that shift anyway, but again, Warsh didn’t submit a dot.
I talked at length about all of that and how it dovetails (no policy pun intended) with the broader discussion about democratic backsliding in America in “Let’s Not Be Naive About Kevin Warsh.” You should read that if you haven’t already. This article’s an addendum of sorts.
I’m going to ask you folks a question, but first I’m going to present you with a quote from Warsh’s press conference. Here’s the quote:
[I]nflation is primarily determined by monetary policy. You bet it is. I’ve said for years inflation is a choice. You bet it is. And today I’m announcing that this Committee unambiguously and unanimously have decided we are going to deliver on that.
That’s Warsh essentially reiterating his opening remarks (“I am pleased to report that members of the FOMC are unambiguous and unanimous: This Committee will deliver price stability”) while responding to Colby Smith, who wondered “how patient the Fed can afford to be after so many years of inflation running above target.”
Now here’s my question: What else would the Fed — could the Fed — have possibly “decided” with regard to the inflation “choice”?
In cases where you have reason to suspect — and you’ll pardon the profanity — that someone’s full of sh-t, as I strongly suspect with Warsh, a useful exercise involves subjecting the things they say, and particularly the things they forcibly assert, to what I call the “Could it have been otherwise?” test. Let’s do that with Warsh’s “strong” statement on price stability.
Imagine that rather than responding to Smith as he did, Warsh said, instead, this:
I’ve said for years that price stability is a choice. You bet it is. And today I’m announcing that, after mulling it over, this Committee has decided we aren’t going to deliver on that after all.
Is that something that was within the realm of the possible? No. No it’s not. That’d be like the fire chief telling a reporter at a town hall that after some debate and careful consideration, the department decided not to put out fires anymore.
Smith asked specifically about the current circumstances, and Warsh gave her a generic answer — a verbatim quote from his opening remarks. Although those opening remarks also referenced the ongoing inflation overshoot, they hardly counted as the emphatic statement of intent that some analysts took them to be.
If Warsh really wanted to make a strong statement on inflation, or otherwise enhance the Fed’s institutional credibility, he could’ve said, at the outset, something like this:
We didn’t issue any forward guidance today. And we don’t plan to for the foreseeable future. However, I want to be clear up front that inflation’s far too high currently, and that if it remains at or near current levels, or rises further, we’ll be statutorily obliged to address it using our tools. That’s all I have to say on the subject, and that’s the last time I’ll make a forward-looking comment on our policy settings.
That would’ve been a strong statement on price stability. And it would’ve had the added benefit of addressing, obliquely, myriad nagging questions about institutional independence in the context of the leadership change.
Saying, as Warsh did instead, that the Fed still plans to look after price stability as a matter of procedural course, is to say nothing at all. They have two jobs, and that’s one of them. Since when does reaffirming a generic commitment to price stability make you a hawk?
Inshallah, the Strait of Hormuz will remain open, input price pressure will recede and whatever’s already in the pipeline in terms of pass-through to core price growth will prove tolerable and fleeting.
Warsh isn’t just hoping for the best in that regard, he’s effectively betting his reputation on it. Because if US inflation stays near 4% or, God forbid, accelerates further, he’ll be between Scylla and Charybdis: Forced to choose between another bout of runaway price growth or hiking rates just weeks before the mid-terms.
If that happens and he tries to avoid raising rates, he’ll have a revolt on the Committee and his reputation for being a credible policymaker will be ruined forever.
If, on the other hand, he were to hike just a few months into his tenure… well, that’s just it: I don’t think he has the gumption. Really I don’t. I don’t know what everyone else saw on Wednesday, but I didn’t see a man prepared to stand up to, let alone stare down, Donald Trump.
“In cases where you have reason to suspect — and you’ll pardon the profanity — that someone’s full of sh-t, as I strongly suspect with Warsh . . .”
I thought Warsh did surprisingly well. I agree with you- Warsh was not more hawkish- the rest of the governors and bank presidents were. But the SEP and dots are really meaningless further than 1-2 meetings anyway (Powell has basically said this as well). My punt is the street way overreacted.
If you can tell me about the geopolitical backdrop over the rest of the year I could give you a good guess on Fed policy.
But nobody can do that. In a best-case scenario, inflation could really drop significantly.
Warsh is political- all fed chairman are of necessity. The question is- is he partisan?
Without forward guidance and less communication, fewer pressers, etc., somehow reminded me of the old Kremlinology.
From WAPO March 28, 1996
Kremlinology is the Cold War-era discipline of interpreting opaque Soviet politics by analyzing obscure clues—like seating arrangements, photo cropping, or paragraph order in state media. The “brown suits” trope refers to an era when analysts scrutinized Soviet officials’ clothing, posture, and body language for signs of ideological shifts, illness, or factional power struggles.
We had people tracking the colour of the Gov’s tie, to see if he was going to increase rates LOL.
But yes, good observation there…the more obscure the oracle, the more people will grab at anything; “if only there was a sign!, any sign!”.
The recent passing of Greenspan reminded me of the days when the size of his briefcase walking into FOMC meetings was taken as an indicator of what might be coming next. With briefcases all but obsolete and until Warsh selects his preferred Fed Whisperer, we’re on our own.
In response to this insightful post, all I can think to say is this:
Inshallah, Allah knows best and Homer would have likely recommended to avoid the whirlpool.
Yeah; I watched him talking and, apart from the factual stuff on dot plots and guidance, etc., my immediate thought was the title of one of your posts a while ago (paraphrasing) – “Powell says words “.
It won’t surprise me if, rather than task-force Kevin, his real moniker will turn out to be Chameleon Kevin.
If appointing a series of task forces is your first step, hiding your indecisiveness behind their findings is the second.
It’s better than even money that Warsh ultimately does as DJT wants. But I’m old, and learned economics in the age of Reagan. And hard as this is to believe post-GFC, back then there was virtually no communication from the Fed. It was exactly like Kremlinology, with the big I-banks all having experts or teams of experts divining the Fed’s thinking based solely on open market operations. A charitable read (to which I’m not inclined) is that KW is just feeling nostalgic.
The fed has a problem, too much debt. It has very few options. IMHO the fed wants to keep the normal interest rate below the inflation rate (which may be somewhat obscured). They want to practice Financial Repression to inflate the debt away. Is that a bad thing? Something has to be done. I hope to invest in a way in which i won’t be paying the bill lol.