'Does Fed have LEGAL POWER?': Moreno presses Warsh on right to issue central bank digital currency

Key Concepts

• Central Bank Digital Currency (CBDC): A digital form of a country's sovereign currency, which the nominee opposes as both legally unauthorized and poor policy.
• Lump of Labor Fallacy: An economic theory suggesting that the amount of work available in an economy is fixed; the nominee argues against this, noting that labor markets evolve and new, currently unimaginable jobs are created.
• Independence vs. Remit: The principle that the Federal Reserve must remain independent in monetary policy but must adhere to its specific legislative mandate rather than adopting a "roving remit."
• Groupthink: The nominee identifies a tendency within the economics profession to conform to consensus, which he intends to counter by being open-minded to external criticism.
• Balance Sheet vs. Interest Rate Tools: The consensus that interest rates are the primary, more effective tool for assisting working-class Americans compared to balance sheet management.

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1. Federal Reserve Policy and Governance

The nominee, Mr. Walsh, emphasizes a return to "first principles" for the Federal Reserve. He argues that while the Fed must act decisively during crises (such as 2008 or 2020) to provide liquidity, its conduct during "normal times" requires significant reform.

• Transparency and Accountability: Senators stressed that the Fed must be transparent regarding its expenditures, specifically citing concerns over billions of dollars spent on renovations.
• Non-Partisanship: The nominee reaffirmed that the Fed must remain independent, non-ideological, and nonpartisan, a sentiment echoed by Senator Chuck Schumer’s past endorsement of the nominee.
• Legislative Mandate: Walsh argued that the Fed was not given a "general roving remit" and must avoid wandering into policy areas outside its specific legislative scope.

2. Economic Outlook and Working-Class Impact

The discussion highlighted the struggles of the working class, particularly regarding the impact of "generationally high inflation" over the past three years.

• Inflation Trajectory: While acknowledging that aggregate statistics show improvement, the nominee noted that there is "more work to do" to ensure the economy fully recovers.
• Labor Market Dynamics: The nominee addressed the rapid pace of AI-driven technological change. He expressed confidence in improved economic output but cautioned that there is a lag between technological adoption and labor market adjustments. He explicitly rejected the "lump of labor fallacy," asserting that the economy will create new, currently unimaginable jobs.

3. Central Bank Digital Currency (CBDC)

A significant portion of the hearing focused on the potential for a CBDC.

• Legal Stance: The nominee explicitly agreed with the Senator’s assertion that the Federal Reserve has no legal authority to issue a CBDC.
• Policy Stance: Beyond the legal argument, Walsh characterized a CBDC as a "bad policy choice" and committed to ensuring the Fed does not move toward its development or exploration under his chairmanship.

4. Immigration and Labor

A point of contention arose regarding the impact of immigration on the Fed’s "maximum employment" mandate.

• The Argument: A Senator argued that adding 10 to 30 million people to the country creates an employment shock that complicates the Fed's ability to maintain maximum employment.
• The Response: The nominee maintained that the Fed must take the labor market "as it is," viewing it as a function of policies set by the administration and Congress, rather than a policy area for the central bank to opine on.

5. Synthesis and Conclusion

The hearing served as a confirmation process for Mr. Walsh, characterized by strong bipartisan support and a focus on institutional reform. The main takeaways include:

• Commitment to Reform: The nominee intends to focus on internal and operational reforms at the Fed to restore public confidence.
• Crisis vs. Normalcy: A clear distinction is drawn between the Fed’s role as a liquidity provider during shocks and its need for disciplined, rule-based policy during stable periods.
• Technological Preparedness: The Fed acknowledges the need to monitor the "insanely fast" pace of AI and its potential to cause short-term employment shocks, particularly in white-collar sectors.

The session concluded with strong indications of the nominee's impending confirmation, with Senators expressing confidence in his integrity and his ability to lead the Federal Reserve through a period of significant economic consequence.