New Fed Chair Warsh to Overturn Traditions, Report Suggests

Taiwan's Central Bank has released a research report indicating that the newly appointed US Federal Reserve Chairman, Kevin Warsh, intends to dismantle the operational logic established over the past two decades. The report contrasts Warsh's monetary policy views with those of his predecessors, including Ben Bernanke, Janet Yellen, and Jerome Powell, suggesting a significant departure from the Fed's recent 'traditional' approach.

Unlike the transparency and forward guidance emphasized since the Bernanke era, Warsh, who models himself after Alan Greenspan, expresses strong skepticism. He believes that continuous central bank intervention and clear guidance foster market expectations of a safety net, which in turn weakens market discipline and encourages excessive risk-taking. Warsh proposes radical communication reforms, including downplaying forward guidance, reducing officials' public statements, and potentially eliminating the quarterly Summary of Economic Projections (SEP) and the dot plot.

The report highlights that Warsh also questions the necessity of regular FOMC press conferences. This shift implies that markets will find it harder to predict interest rate paths based on standard Fed communication. Monetary policy may regain a degree of unpredictability and flexibility, potentially avoiding credit crises stemming from forecasting errors but increasing uncertainty about future policy directions.

Furthermore, Warsh advocates for a different approach to inflation assessment, viewing the core Personal Consumption Expenditures (Core PCE) price index as a crude and outdated measure. He prefers 'trimmed mean inflation' or 'median inflation' to exclude extreme price fluctuations and one-off disturbances, thereby providing a more accurate view of 'core inflation.' On the balance sheet, Warsh is a staunch proponent of 'shrinking the balance sheet,' criticizing the Fed's large holdings of long-term U.S. Treasury bonds. He argues that when the Fed holds more outstanding government debt than many market participants, monetary policy effectively becomes 'fiscal policy in disguise.' He contends that the massive balance sheet does little to achieve price stability or maximum employment, instead creating unfair wealth distribution effects. He plans to push for balance sheet normalization and a reduction in its size, shifting asset allocation towards shorter-duration Treasury bonds.