Kevin Warsh: The 'credibility deficit' lies with the incumbents that are at the Fed

Key Concepts

• Inflation
• Federal Reserve (The Fed)
• Interest Rate Cuts
• Monetary Policy
• Quantitative Easing (QE)
• Financial Conditions
• Real Economy
• Productivity Gains
• Artificial Intelligence (AI)
• Full Employment
• Credibility of the Fed
• Regime Change in Monetary Policy
• Tariffs

Inflation and the Fed's Credibility

The speaker argues that the Fed's hesitancy to cut interest rates indicates a lack of confidence in its own inflation-fighting credibility. If the Fed were truly credible, it could look past temporary price fluctuations. The speaker believes the Fed's past missteps on inflation continue to haunt them.

Independence of the Fed and Presidential Influence

The speaker addresses the debate surrounding the Fed's independence, acknowledging the importance of the market's perception of that independence. While the Fed Chair is appointed by the President, the speaker emphasizes the need for the appointee to demonstrate independence.

Experience and Monetary Policy

The speaker highlights the importance of experience in navigating economic challenges, citing their own track record during the 2008 financial crisis and the 2020 pandemic. They argue that experience allows one to understand when to be dovish (accommodative) and when to be hawkish (restrictive) with monetary policy.

• Example: In 2021-2022, with interest rates at zero, the Fed buying $100 billion in assets monthly, and strong payroll growth, the speaker believes the Fed should not have labeled inflation as "transitory."

Quantitative Easing and Financial Conditions

The speaker discusses quantitative easing (QE) as a monetary policy tool created during the financial crisis. They criticize the current Fed's view that the balance sheet has nothing to do with monetary policy. The speaker argues that financial conditions are currently too loose, with IPO markets, credit spreads, and SPACs all indicating a hot market.

Real Economy vs. Financial Markets

The speaker contrasts the loose financial conditions with the struggles of the real economy, particularly for first-time homebuyers and small businesses. They propose shrinking the Fed's balance sheet to take some looseness out of financial markets and redeploy liquidity to the real economy.

AI, Productivity, and Employment

The speaker acknowledges the rapid pace of the AI revolution and its potential impact on the job market. While optimistic about the US's position at the forefront of this technological shift, they express concern about the K-12 education system's ability to prepare young people for the changing landscape.

Regime Change in Monetary Policy

The speaker advocates for a "regime change" in the conduct of monetary policy. This involves a shift in the Fed's approach, prioritizing the real economy over financial markets and regaining credibility through decisive action. A rate cut is presented as the first step in this process.

Conclusion

The speaker presents a comprehensive critique of the current Fed's policies, arguing for a more proactive and responsive approach to monetary policy. They emphasize the need to address the disconnect between financial markets and the real economy, while also preparing for the potential impacts of AI on the job market. The speaker believes that with the right policies, the US can enter a new "golden age."