Data being used to judge inflation is ‘quite imperfect,’ Kevin Warsh says at hearing

Key Concepts

• Federal Reserve (Fed) Independence: The argument that the Fed must earn its autonomy through institutional integrity rather than assuming it as a constitutional right.
• Inflation Measurement: The debate over moving away from PCE (Personal Consumption Expenditures) and core inflation toward "trimmed mean" or "median" metrics.
• Phillips Curve: An economic theory suggesting an inverse relationship between unemployment and inflation, which the speakers argue is flawed and should be discarded.
• Fed Transparency: The proposal to make Fed meetings "live" and public to prevent groupthink and scripted decision-making.
• Reverse Repos: A monetary tool used by the Fed to manage liquidity, criticized here as a market-distorting mechanism used to curry political favor.

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1. Critique of Fed Monetary Policy and Metrics

The speakers argue that the Federal Reserve relies on outdated and ineffective models.

• Measurement Flaws: John Carney notes that the Fed’s reliance on the PCE price index is a "rearview mirror" approach. He advocates for trimmed mean and median inflation numbers, which filter out extreme outliers to provide a more accurate trend.
• Data Points: The speakers cite the Dow’s trimmed mean at 2.3% and the Cleveland Fed’s median at 2.7%, suggesting that current inflation is not "runaway" but that the Fed’s policy framework is failing to address economic reality.
• The Phillips Curve: Steve Forbes argues that the Fed should abandon the Phillips Curve, labeling the idea that "prosperity causes inflation" as "nonsense."

2. Institutional Reform and Transparency

A significant portion of the discussion focuses on the "black box" nature of the Federal Reserve.

• Live Meetings: John Carney proposes that Fed meetings should be conducted live, similar to the Bank of England, where officials debate and publish dissents. This would replace the current system where officials arrive with pre-written scripts and predetermined votes.
• The "Wizard of Oz" Analogy: The speakers suggest that opening the curtain on these meetings would reveal that Fed officials often lack a clear understanding of the economic levers they are pulling.
• Congressional Oversight: The panel emphasizes that the Fed is a "creature of Congress," not a fourth branch of government, and should be subject to rigorous investigation regarding its compliance and internal conduct.

3. Political Independence and Accountability

The discussion challenges the narrative that the Fed is—or should be—immune to political criticism.

• Earning Independence: Kevin Warsh is cited for the argument that the Fed must earn its independence through behavior. The speakers point to past scandals involving Fed officials trading stocks as evidence of a lack of institutional integrity.
• Historical Precedent: The panel refutes the idea that presidential criticism of the Fed is unprecedented or a violation of norms. They cite historical examples:
  • Lyndon B. Johnson: Physically intimidated Fed Chair William McChesney Martin.
  • Jimmy Carter: Effectively fired Arthur Burns.
  • Ronald Reagan: Frequently criticized Fed policy.
• The Trump-Warsh Dynamic: The speakers highlight a moment where Kevin Warsh clarified that Donald Trump never pressured him on specific policy items during interviews, focusing instead on character and competence.

4. Notable Quotes

• On Fed Performance: "The forecast doesn't forecast, the policy doesn't work." — Larry Kudlow
• On Institutional Integrity: "The Fed has to earn its independence by its behavior institutionally." — Kevin Warsh (as quoted by the panel)
• On Transparency: "It would be much better if people could come into that meeting and they’d have a chance of changing minds instead of everybody coming in with their decision." — John Carney

5. Synthesis and Conclusion

The consensus among the speakers is that the Federal Reserve is currently trapped in a cycle of ineffective, politically motivated, and opaque decision-making. The proposed path forward involves a fundamental shift in how inflation is measured, a move toward radical transparency in policy meetings, and a reassertion of Congressional oversight. The speakers conclude that the Fed’s "independence" is not a shield against criticism but a status that must be continuously justified through transparent, data-driven, and accountable governance.