Kevin Warsh Criticizes Fed's Inflation Mismanagement, Calls for Restructuring

Kevin Warsh, a prominent figure in the financial world and a potential successor to the Federal Reserve Chair, delivered a scathing critique of the Federal Reserve during a speech at the Group of 30 event in Washington on April 25. Warsh, who served as a member of the Federal Reserve Board and was considered by Trump for the position of Treasury Secretary, is often referred to as the "shadow chairman" of the Federal Reserve. His remarks come at a time of heightened tension between the Federal Reserve and the Trump administration.

Warsh accused the Federal Reserve of making "systemic errors" that have led to the most severe inflation surge in a generation. He argued that the Fed's independence is fundamentally a "conditional contract" and that the current crisis of public trust is a result of its own actions. These actions include the expansion of power during the crisis response, significant missteps in managing inflation, and inconsistent stances on social issues, all of which have eroded public trust.

Warsh highlighted that during the 2008 financial crisis, the Federal Reserve implemented extraordinary policies to support the economy. Former Fed Chair Paul Volcker warned that the Fed was pushing the limits of its legal authority and undermining core principles that had been followed for decades. However, these warnings were ignored, and the Fed has since become deeply involved in various economic decisions of the U.S. government, blurring its role and leading to systemic biases in macroeconomic policy.

Warsh criticized the Fed's role in the post-crisis period, noting that while quantitative easing (QE) was necessary during the crisis, its continuation long after the crisis ended was problematic. He pointed out that the Fed's balance sheet, which is now at $7 trillion, is ten times larger than when he joined the Fed. This expansion has blurred the lines between monetary and fiscal policy, leading to unsustainable government spending.

Warsh also criticized the Fed's involvement in non-traditional areas such as climate policy and social equity. He noted that the Fed's attempts to address these issues have often backfired, leading to unintended consequences. For example, the Fed's "inclusive employment" policy, which redefined its mandate to include "inclusive targets," has been criticized for potentially tolerating higher inflation to achieve specific employment goals.

Warsh argued that the Fed's independence is not an inherent right but a result of its ability to achieve specific policy goals. He warned that the Fed's frequent overreach into fiscal policy and social issues is eroding its core independence. He called for a strategic restructuring of the Fed's priorities, emphasizing the need to return to its core mandate of price stability and rebuild public trust.

Warsh concluded by stating that the Fed's existence is justified only by its ability to serve the public good. He urged the Fed to focus on its core responsibilities and avoid overreaching into areas beyond its expertise. Only by doing so can the Fed regain its independence and public trust.