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If confirmed as Chairman of the Federal Reserve, is Kevin Wersh going to be the inflation hawk or Donald Trump’s poodle? His repeated statements on monetary policy and the Fed’s broader responsibilities suggest the former. But his recent statements on the inflation outlook and the fact that Trump elected him largely indicate the latter. More broadly, is he or she a person of conviction and decision-making wind vaneFlowing with the wind of the Republican side in politics and therefore favoring loose monetary policy when Republicans are in power and favoring tight money when Democrats are in power?
Warsh’s words indicate that he is very much a “hard money” central banker. Remarkably, In a speech to the Shadow Open Market Committee In a speech given in New York in March 2010, when the US economy, remember, was still reeling from a deep recession following the 2008 financial crisis, he had already begun to worry about Fed credibility.
He told four main things. First, the Fed’s independence applies only to monetary policy, not “regulatory policy, consumer protection, or other responsibilities assigned to the Federal Reserve.” Second, “the Fed, as a first responder, must strongly resist the temptation to be the last rescuer”. Third, “Governments may be tempted to influence the central bank to keep monetary policy looser for longer periods of time to stimulate debt financing and activity”. But “the popularity that central bankers should seek exists only in history books”. Finally, “Central banks, here and abroad, have worked for decades to bring inflation to levels consistent with price stability. We must not put these hard-won gains at risk.”
Intellectually, at least, today’s Warsh seems a lot like 2010. his imf lecture In an April 2025 speech, he emphasized not only the Fed’s “institutional drift” but also its recent “failure to satisfy an essential part of its statutory mandate, price stability.” It has also contributed to the explosion of federal spending. And the Fed’s peripheral role and underperformance have weakened the important and worthy case for monetary policy independence. He made other criticisms, the most important of which was that “the Fed has been the most significant buyer of US Treasury debt and other liabilities backed by the US government since 2008”. He claims: “Fiscal dominance – where the country’s debt constrains monetary policy makers – was long thought of by economists as a possible end state. My view is that monetary dominance – where the central bank becomes the ultimate arbiter of fiscal policy – is the clearer and more present danger.” For Warsh, easy money is a path to ruin.
So what convinced Trump, the embodiment of fiscal dominance, and did scolding poor jay powell Appointing Warsh as chairman, perhaps in addition to his good looks, as a “blow” for not cutting interest rates faster? One reason may be that he likes Warsh’s hostility toward the Fed’s “woke” over-reach. Another may be that they like its inclination toward financial regulation. Another possibility is that he is a relatively conservative choice, whose appointment should calm jittery markets (as has been the case so far). But an important point to be made is that Wersch simply concludes that inflation is no longer a threat, because technology based productivity growth. This may also be true. As Warsh says, Alan Greenspan made a similar bet about the impact of the Internet in the 1990s. But it’s a bold leap for someone who predicted inflation amid a deep recession in 2010. If he gets his way, he will replace the Fed’s “data-dependence” with one of guesswork. Given America’s huge fiscal deficit and debt and the rapid growth of the US economy, this would be a big gamble.
Then how can Varash be elected? I actually agree with some of Warsh’s criticisms of the Fed, particularly its drift into areas that are not part of its core functions. I also agree that post-pandemic inflation was partly its fault: along with other central banks, it also failed to consider that a surge in money supply in 2020 could lead to a surge in price levels. I also agree with Warsh that the backward-looking monetary policy framework introduced in 2020 was an ideological and practical error (not to mention grossly ill-timed).
It’s also comforting to know that the Fed is an institution. The Fed is more than a chair. Its leadership matters a lot. But Wersh will be unable, at least in the short term, to misbehave with other members of the Federal Open Market Committee or even his staff.
Yet concerns remain on two fronts. The first is that Wersch may be very willing to argue for whatever Trump wants, even if it means accepting fiscal dominance, in spades. It also appears that he intends to justify doing so by offsetting lower short-term rates with higher long-term rates, as the Fed’s balance sheet has aggressively shrunk. Also, the US Treasury is likely to move towards short-term financing. With the US yield curve more strongly upward sloping, the likely outcome will be greater demand for dollar financing in the short term and less demand in the longer term. On top of this, given the decline in bank reserves and financial deregulation, financial sector balance sheets will become more fragile. The incentive to hold the dollar may also wane, given the fear of falling short rates and increasing inflation. The result could be another financial crisis.
Yes, Warsh is a better candidate than many of the other candidates on the list. But he is a confused, perhaps delusional person. America and the world need a Fed Chairman who can stand up to Trump. To his credit, Powell has proven himself to be such a man. Will Warsh?
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