Kevin Warsh must move fast to undo the worst Fed mistakes in decades
President Trump hit the bullseye in selecting Kevin Warsh as the next Federal Reserve Board chairman.
In contrast to the failed tenure of Jerome Powell, Warsh is not political, and he is not an inflationist. He has declared many times that "I reject the discredited Phillips Curve notion that growth causes inflation." He believes we can return to a prosperous era of low inflation and high growth, as we saw under Paul Volcker in the 1980s and Alan Greenspan in the 1990s.
Powell never understood that. He believed that growth causes inflation. What we got instead was a near Fed-created stock market crash and slow growth in 2018, followed by four years of Biden-era stagflation, with stagnant real wages AND high prices.
Powell is a lame duck, and a wounded duck he should resign immediately. He won’t, so we have four more months before regime change and the abandonment of his monetary and interest rate mismanagement that gave us 9% inflation.
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This means Warsh must be ready to reverse monetary course on day one.
First, I agree with former World Bank President David Malpass that the overriding goal of the Warsh Fed should be to keep the dollar strong and prices stable. Defend the dollar.
I’m a little worried that Trump wants a weak dollar, which is what Powell has delivered of late. The decline in the dollar, relative to other currencies and gold, are trends that could raise prices and put the dollar’s world reserve-currency status at risk. Don’t go there.
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Second, Warsh must move quickly to clean house at the Fed. He has promised to cut the bureaucracy by 30%. That’s a good start.
The Fed doesn’t need more than 3,000 bureaucrats and hundreds of Ph.D. economists, given all the mistakes they’ve made in recent years. They could have just as easily created 9% inflation with half that many people.
This is urgent because the empire is already preparing to strike back.
Krishna Guha, a former New York Fed official, warned in the Financial Times that if Warsh tries to put in place his "restructuring plan in the spirit of MAGA regime change, it will maximise resistance and opposition from the vast majority of others in the system."
It’s critically important for Warsh to "know thine enemy," or the Fed’s blob will chew him up and spit him out. The Fed staff will openly work to subvert Warsh’s primary strategy to conquer inflation.
It would also set a good example of fiscal restraint for the Fed to practice what it preaches: fiscal discipline. Let’s not forget that Powell spent nearly $2 billion renovating the Taj Mahal–like Fed building in downtown Washington. Talk about setting a bad example.
Third, Warsh is exactly correct that adding trillions of dollars to the Fed’s now $6.5 trillion balance sheet "was the worst Fed mistake in 45 years." Just 25 years ago, the Fed’s balance sheet contained less than $1 trillion in assets, and last year it hit an all-time high of more than $8 trillion.
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Speeding up the sale of these stranded assets would help suck excess money out of the economy and bring inflation down to its 2% target while boosting affordability.
There’s an old saying about success in life: "You always want to succeed a failure." Warsh is now in that position as he replaces the Powell regime. He can help Trump restore price stability, and if he does, he will go down in history as one of the greatest Fed chairmen.
Finally, adopt an interest-rate price rule and make it transparent to the world. My preferred price index is a basket of commodities ranging from gold to coal to copper to cotton. If the commodity index starts rising, there’s too much money — raise rates. If prices start falling, cut rates.
Warsh’s best gift to Trump would be restoring price stability and dollar dominance. If he succeeds, he will go down in history as one of the greatest Fed chairs of all time.