Warsh's Senate Testimony on Fed Nomination
Kevin Warsh is scheduled to testify before the Senate Banking Committee on Tuesday regarding his nomination to become the next Federal Reserve chairman, replacing Jerome Powell whose term ends in May. Senators are expected to scrutinize his stance on the Fed's longstanding 2% inflation target, especially as inflation has lingered above that level since the pandemic, driven by supply disruptions, tariffs, and recent energy shocks from the Iran war.
The 56-year-old former Fed governor from 2006 to 2011 provided a preview of his views in a written opening statement reviewed by FOX Business. He affirms commitment to the Fed's dual mandate of price stability and full employment but stops short of endorsing the specific 2% long-run inflation goal.
Price Stability as the Fed's Core Responsibility
Warsh frames price stability as non-negotiable. Congress assigned the Fed this duty without room for excuses. He asserts that inflation is a policy choice for which the central bank must own full accountability.
Low inflation serves as the Fed's essential defense against criticism and economic volatility. When inflation surges, as it has in recent years peaking at 9.1% in June 2022 and now hovering around 3%, it erodes purchasing power, particularly harming lower-income households. This not only diminishes living standards but also undermines public trust in monetary policy independence.
First, Congress tasked the Fed with the mission to ensure price stability, without excuse or equivocation, argument or anguish. Inflation is a choice, and the Fed must take responsibility for it.
Skepticism Toward Precise Inflation Targets
Drawing from his 2023 testimony to the British House of Lords Economic Affairs Committee, Warsh prioritizes price stability as the 'North Star' for policy. He argues that stable prices are prerequisite for sustainable full employment and economic growth at potential.
Volatile prices complicate planning for households and businesses. Warsh doubts the precision of inflation measurements, noting that distinguishing between 1.7%, 2.0%, or 2.3% is unreliable. Economics lacks the exactitude of physics, he contends, making point targets like 2% problematic.
He favors a range-based inflation target to account for measurement errors and evolving economic structures. Fixating on a single number like 2% invites trouble, especially as global dynamics shift. This precision obsession, he claims, prompted excessive stimulus pre-pandemic, fueling the inflation surge.
Frankly, we would not know the difference whether inflation was running at 1.7%, 2.0% or 2.3% in the United States or in the United Kingdom because we do not measure it that precisely. Economics is not physics – at least not yet.
I broadly favor ranges. Price stability, in the numerical definition, will change in the times. The structures in the global economy are changing even as we speak. It strikes me that agreeing on some permanent basis to 2.0% is asking for trouble.
Current Inflation Landscape
U.S. inflation remains elevated. The Fed's preferred PCE index stood at 2.8% in February, with March data pending. The CPI gauge jumped to 3.3% in March from 2.4% in February, reflecting war-related energy pressures.
Warsh's nomination faces headwinds amid these dynamics and his $131 million disclosed fortune. His prepared remarks signal a potential shift from the Fed's status quo, emphasizing flexible targeting to better safeguard price stability.
