By Ann Saphir and Howard Schneider
Palo Alto, California (Reuters) – Kevin Warsh, an apparent frontrunner to be U.S. President Donald Trump’s pick to be the next chair of the Federal Reserve, on Friday suggested a possible pathway to the lower policy rates that Trump has repeatedly pressed the current Fed Chair Jerome Powell to deliver, and delivered a fresh dig at the Fed’s conduct of monetary policy.
A large and often growing Fed balance sheet can work at cross-purposes with the Fed’s main policy lever of setting short-term borrowing rates, Warsh told a monetary policy panel at Stanford University’s Hoover Institution, but “if the printing press could be quiet, we could have lower policy rates.”
Warsh served as Fed Governor from 2006 until 2011, when he quit because he opposed the Fed’s continued balance sheet expansion as central bank overreach that encouraged the expansion of the nation’s debt. The Fed is currently reducing its balance sheet.
On Friday, Warsh offered an added criticism of the Fed, saying there is no “cruel choice” between the Fed’s two objectives of stable prices and full employment, a reference to the idea long prevalent among many central bank policymakers that the cost of bringing down inflation is harm to the job market.
“What it means is, we don’t have to push the unemployment rate up to get the inflation rate to fall,” Warsh said on the sidelines of the conference. “At the Fed, when they talk about how we get inflation down, what they really mean is, how do we get the unemployment rate up … we need to throw people out of work to get the inflation rate to come down, which is nonsense. But that’s embedded in economic thinking, including at the Fed.”
The idea that a “cruel choice” is “nonsense” is actually largely consistent with how the Fed has conducted policy over the last several years, as it brought inflation down from 40-year highs without pushing the unemployment rate above the rate that most economists feel is consistent with full employment.
Powell has repeatedly said he does not feel the current labor market is a source of inflation, suggesting that crushing the job market would do little to lower inflation.
Warsh made his remarks at a conference and an institution steeped in Bush-Reagan Republicanism, now out of favor as Trump and his ideas have come to dominate the party. The conference was convened in part to celebrate John Taylor, a Bush economic adviser and author of one of the most famous monetary policy rules; Condoleezza Rice, Bush’s Secretary of State, spoke on Thursday.
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