Kevin Warsh on the Fed’s Mistakes and the Consequences
The chairman-designate on where the central bank has gone wrong and what independence means.
Kevin Warsh in New York City, May 8, 2017. Brendan McDermid/ReutersPresident Trump announced Friday that he will nominate Kevin Warsh as chairman of the Federal Reserve Board.
Mr. Warsh served as a Fed governor from 2006 through 2011 and has since written frequently for these pages.
These are excerpts from his Journal op-eds.
A related editorial appears nearby.
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From “The High Cost of the Fed’s Mission Creep,” April 28, 2025:
For about 40 years, Americans scarcely thought about changes in the price level.
If the Fed’s enviable track record of price stability had continued through this decade, central bankers may have been granted wider berth.
But then the Fed foundered on fundamentals and inflation surged.
Stable prices were the Fed’s plot armor.
As in the movies, it was protection for the protagonist against those who would dare a challenge.
The Fed’s roving remit and grand ambitions, however, expanded its surface area and exposed its vulnerability even more.
Central-bank independence is more often cited than defined.
Independence isn’t a policy goal unto itself.
It’s a means of achieving important and particular policy outcomes.
Independence is reflexively declared when any Fed policy is criticized.
Congress has granted important functions to the Fed in bank regulation and supervision.
I don’t believe the Fed is owed any particular deference in bank regulatory and supervisory policy.
Fed claims of independence in bank matters undermine the case for independence in monetary policy.
And when the Fed turns away from its creed and tradition, exercising powers that are the province of the Treasury Department, or taking positions on societal issues, it further jeopardizes its operational independence in what matters most.
I strongly believe in the operational independence of monetary policy as a wise political economy decision.
And I believe that Fed independence is chiefly up to the Fed.
That doesn’t mean central bankers should be treated as pampered princes.
When monetary outcomes are poor, the Fed should be subjected to serious questioning, strong oversight and, when they err, opprobrium.
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From “The U.S. Needs Economic Regime Change,” March 20, 2023:
History will give a full accounting of the grave errors committed in recent years in economic policy.
A central lesson is already clear: Nothing is as expensive as free money.
The costs of the Federal Reserve’s zero-interest policy are multiplying: The misallocation of capital—goosing the price of the riskiest and least-productive of assets—set the conditions for boom and bust.
The financing of the “big state” set the country on an unsustainable fiscal trajectory.
The extraordinarily loose financial conditions created herd behavior among market participants and firms and complacency among policy makers, including regulators.
The surge in inflation substantially raised the cost of living for citizens and undermined business planning.
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From “The Fault Lies in R-Star and in Ourselves,” Sept, 26, 2018:
Policy makers are currently rejoicing in their good fortune.
The U.S. economy is booming: Output is growing more than 50% faster than the Fed forecast a year ago, wages are accelerating, and labor markets are the strongest they’ve been in at least a generation.
Capital investment is strengthening, and productivity shows some improvement.
Asset prices are high.
Credit is cheap and widely available.
And inflation is running at or near the Fed’s avowed target.
The Trump administration’s reforms in tax and regulatory policy were well-timed.
They caused a business and wage-earner expansion to follow on the heels of a consumer-driven, housing-led expansion that was starting to show its age.
The strong trends in the U.S. economy are likely to continue.
Even so, history and hard experience tell us that a boom is not a time for triumphalism, especially for the guardians of financial stability at the Fed.
The most consequential period in economic policy is often when the embers of the last fire are gone and the first sparks of the next are not yet visible.
Policy makers should not be dismissive of less likely, but more damaging tail events.
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From “The Federal Reserve Needs New Thinking,” Aug. 25, 2016:
The economics guild pushed ill-considered new dogmas into the mainstream of monetary policy.
The Fed’s mantra of data-dependence causes erratic policy lurches in response to noisy data.
Its medium-term policy objectives are at odds with its compulsion to keep asset prices elevated.
Its inflation objectives are far more precise than the residual measurement error.
Its output-gap economic models are troublingly unreliable.
The Fed seeks to fix interest rates and control foreign-exchange rates simultaneously—an impossible task with the free flow of capital.
Its “forward guidance,” promising low interest rates well into the future, offers ambiguity in the name of clarity.
It licenses a cacophony of communications in the name of transparency.
And it expresses grave concern about income inequality while refusing to acknowledge that its policies unfairly increased asset inequality.
The Fed often treats financial markets as a beast to be tamed, a cub to be coddled, or a market to be manipulated.
It appears in thrall to financial markets, and financial markets are in thrall to the Fed, but only one will get the last word.
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