Inflation, regime change, & the Fed

There has been a sense of relief in markets and elsewhere at the nomination of Kevin Warsh as the new Federal Reserve Chair. He is not an institutional bomb-thrower, has relevant experience, and is regarded as less explicitly deferential to Mr Trump than Kevin Hassett may have been.

Opinion is split on his policy tendencies. He was a hawk when on the Fed Board during the GFC, arguing against QE. However, his more recent public statements indicate that his hawkish views have moderated. Indeed, it is highly unlikely that Mr Trump would have nominated him unless he had received some assurances in terms of his thinking about Fed policy, at least over the next few years.

Of more relevance is Mr Warsh’s conviction-heavy approach to monetary policy. Rather than relying on available data, which he sees as inevitably backward-looking, his stated preference is to make decisions based on a forward-looking story.

In particular, his recent speeches and writing make it clear that he interprets the current situation as similar to the 1990s, with productivity growth from technology likely to drive inflation down; and believes that a Greenspan-style approach to cutting rates is appropriate.

Reliance on the Greenspan analogy feels like an attempt to put a cloak of intellectual respectability around a preferred policy direction. The only way to be nominated to a Fed leadership role by this Administration is to commit to meaningful rate cuts, even in the context of persistently above target inflation; and the Greenspan analogy is a way to do this in a vaguely credible way.

The full note is available at: https://davidskilling.substack.com/p/inflation-regime-change-and-the-fed