Originally published at: Economic Experts Skeptical Trump Fed Chair Pick Will Be Free from Political Influence
President Donald Trump last Friday announced his intent to nominate former Federal Reserve Board Governor Kevin Warsh to chair the central bank, tapping a Republican economist with industry and government street cred, but whose public displays of political obsequiousness could contribute to distrust in Fed independence. Trump’s insistence that federal agencies previously immune to presidential…
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I am sure Tillis will show near Flake-like resolve in blocking Trump’s nominee!
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Warsh is currently an economic policy fellow at the Hoover Institution, a right-leaning think tank out of Stanford University.
That alone should be as disqualifying as being a member of the Charles Koch Foundation-funded Smith Institute for Political Economy and Philosophy at Chapman University.
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Economic Experts Skeptical Trump Fed Chair Pick Will Be Free from Political Influence
Ya think?
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Skeptical?
Isn’t it a known that the First Felon only wants a puppet in there to do his bidding?
And the confirmation hearing will be unanimous. Bet on it.
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Kevin Warsh is a poltical hack and economists know this:
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But the Senate will dutifully confirm this guy, along party lines with probably Fetterman joining the GQP to further ruin the economy and the country.
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“likely false pretense of mortgage fraud” lolololololol surely you jest and don’t call me Shirley.
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Kevin Warsh and Weathervane Economics
A man with his finger in the political wind
Paul Krugman
Feb 2 
On Friday I had some, well, less than positive things to say about the nomination of Kevin Warsh to head the Federal Reserve. As I noted, many news reports have characterized Warsh as a monetary hawk, but I argued that he’s more of a political weathervane: He’s for tight money when Democrats are in power, but all for running the printing presses hot when a Republican is in the White House.
Writing in the New York Times, Catherine Rampell says more or less the same thing I did, but more politely.
And I have a picture! Neil Dutta of Renaissance Macro, another skeptic, asked Claude to rate Warsh’s speeches and public comments over the years for monetary hawkishness or dovishness. He sent me the chart at the top of this post. Warsh was very hawkish in the years following the 2008 financial crisis. But he turned abruptly dovish … after Donald Trump won in 2024.
If you look carefully at that chart, you’ll see that there’s a gap in the timeline for several years after Warsh was passed over for Fed chair during Trump’s first term. Dutta tells me that this is because he didn’t say enough in public about monetary policy for Claude to rate his position.
Why was Warsh so opposed to easy money after the 2008 financial crisis? Initially he argued against low interest rates and quantitative easing because, he warned, they would lead to excessive inflation. He was, however, completely wrong, and it would have been a disaster if the Fed had followed his advice. As Rampell says,
Of course, plenty of people get predictions wrong. But not usually this wrong, without acknowledgment or explanation of how they’d avoid a similarly catastrophic error next time, particularly when expecting a promotion.
OK, she’s not that much more polite than I was.
It’s also worth noting that Warsh has been extremely caustic, condemnatory and insulting about the Federal Reserve’s track record. But during the biggest, most consequential monetary debate of modern times, Warsh got it totally wrong — while the professional staff at the Fed got it mostly right.
Also, Warsh continued to argue vociferously against easy money even after the inflation he predicted circa 2010 failed to materialize. Rather than changing his views, he came up with new arguments to justify an unchanging policy position, seemingly inventing new economic principles on the fly. I’ll discuss debates about monetary policy at length next weekend, but let me just say here that Warsh’s biggest effort to justify tight money in the face of low inflation and still-weak employment, made in 2015, was an intellectual mess. Larry Summers (I know, I know) called it “the single most confused analysis of monetary policy that I have read this year.”
Given this history, why have so many established economists rushed to say nice things about Warsh? Well, I’m an economist too, and we’re supposed to think about incentives. Imagine yourself as a policy-oriented economist who tries to have contact with and influence over policymakers. Do you want to risk making a bitter enemy out of the next chair of the Federal Reserve? I’m personally wondering how I’ll be greeted at some of the conferences I’m supposed to attend over the next few months.
Still, readers deserve to be told the truth. Warsh might surprise us all by showing unexpected integrity, but don’t count on it. He may be better than the alternatives, but that’s a very low bar, which mainly tells us how sorry a state economic policymaking — actually, policymaking of any kind — has reached in the age of Trump.
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And also this:
Federal Reserve 101
What America’s central bank does and why it matters
Paul Krugman
Feb 1 ∙ Paid
Donald Trump just selected Kevin Warsh as the next chairman of the Federal Reserve Board. It’s an … interesting … pick, since Warsh has been harshly critical of the institution he’s now supposed to run, accusing it of “grave errors” that deserve “opprobrium.” I had a few things to say about Warsh on Friday. But after writing that post I realized that many readers may not have a good understanding of what the Fed does and why it matters, let alone the significance of Warsh’s attacks on the institution. So I’m going to devote this week’s primer to the Fed’s role as America’s central bank, the custodian of its money.
For readers waiting for the final installment of my series on China’s trade surplus, I haven’t forgotten about it. But if a tree falls in the middle of a forest fire, does it make a sound? I want to wait on that piece until a time when its message won’t be drowned out by events. Also, I will write at least one and probably two follow-up posts about the Fed, Next week I’ll take on Warsh’s critique of the Fed’s past policy and what he might try to do. Beyond that, today’s post is limited to a discussion of monetary policy, but the Fed also plays an extremely important role in supervising and regulating banks and other financial institutions. More about that, too, in the future.
Today, I will discuss the following:
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What the Federal Reserve does
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Why the Fed matters for the economy
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The Fed’s objectives and its critics
What the Federal Reserve does
Like almost all modern economies, the U.S. economy runs on fiat money — pieces of green paper bearing pictures of dead presidents that, since 1933, haven’t been redeemable into gold or any other asset. Today’s dollars have value simply because the government says they have value.
OK, what I just said oversimplifies reality in three ways.
First, control of the money supply rests not with a normal government department but with the Federal Reserve, America’s central bank . The Fed is what the British call a “quango” — a quasi-non-governmental organization. It has a complicated governing structure and normally operates with considerable independence. Congress and the president could rescind that independence and force the Fed to obey presidential orders. But by long-standing convention, that is not how the Fed operates or is governed. It’s simply not a part of either the executive branch or the legislative branch of the federal government.
Second, the Fed doesn’t exactly control the economy’s money supply – usually defined as the total amount of currency circulating in the economy plus other highly liquid means of payment like checkable deposits and money market funds. Instead, the Fed controls the monetary base , the sum of currency in circulation and the reserve balances that private banks have on deposit in accounts at the Fed. Banks are required to hold a certain level of reserves at the Fed to make sure they can honor their obligations to their depositors. However, banks can always convert their “excess reserves”, the amount in excess of their mandated reserves, into currency they put into circulation – say by lending them out to borrowers. So the Fed controls the monetary base, but not how it is allocated between currency and reserves. Conceptually, the monetary system looks like this:
Here’s how the components of the monetary base have changed over the past 20 years:
Source: FRED
Before the 2008 financial crisis the monetary base overwhelmingly consisted of currency. During the deep recession and sluggish recovery that followed, the Fed tried to support the economy by buying large numbers of bonds from banks — a process known, confusingly, as “quantitative easing.” By buying enormous quantities of bonds, the Fed hoped to push down long-term interest rates to help stimulate a depressed economy.
There was a second round of quantitative easing during the Covid crisis, during which financial markets — in a largely forgotten incident — came perilously close to a complete meltdown. In both episodes the Fed paid for these bonds by adding credits to the banks’ reserve accounts.
In these episodes of quantitative easing, where did the money used to buy bonds from banks come from? Nowhere — the Fed simply conjured that money out of thin air. The Fed effectively injected liquidity into the economy by buying bonds with money it created, which it hoped would lead to a fall in long-term interest rates. Thus the source of the Fed’s economic clout is its ability to create money at will – fiat money.
Third, when economists talk about the money supply they don’t mean just physical currency – i.e., dollar bills. The vast majority of payments in a modern economy don’t involve currency. Instead they’re made with debit cards, digital transfers, and still, in some cases, by writing checks. While these payments are backed by bank deposits or other highly liquid (easily converted to cash) assets like money market funds, these are in a real sense “privately-created” money because they don’t involve physical, government-issued currency or official bank reserves. There are several classifications of the money supply depending upon what kind of liquid asset is included – poetically named M1, M2, and so on.
The Fed cannot directly control these various types of private money, and thus it can’t directly control the money supply. Yet despite controlling only a very limited range of the economy’s financial assets (that is, the monetary base), the Fed has vast power over financial conditions and the economy as a whole. How and why?
Why the Fed matters for the economy
The Fed’s quantitative easing after the 2008 financial crisis and again in 2020 led to a huge expansion of the monetary base in the form of bank reserves. But even after that expansion, the monetary base remains fairly small compared with overall financial markets. Here’s a comparison of the monetary base with total financial assets owned by households:
Source: FRED
Given these numbers it’s easy to imagine being skeptical about how much the Fed matters, and some people are. After all, the Fed controls that line at the bottom, but how can that move markets and the economy when the monetary base is only about 4 percent as large as total household financial assets?
In fact, however, control of the monetary base gives the Fed a crucial strategic role in the economy. Granted, as I said earlier, most payments are made with privately-created money. When I pay my local fruit and veg vendor with Venmo, and he then uses his positive Venmo balance to pay his wholesaler, no official, government money has changed hands. It’s all done through private “Venmo” money. But it is also true that if I am carrying a positive balance in my Venmo account, Venmo is obligated to give me official, government money for that balance if I ask for it. In other words, private money-like deposits always involve a promise to redeem that deposit for official, government money.
Therefore the financial system must be able to acquire official money when needed. As a result, being the gatekeeper of official money – the monetary base — gives the Fed substantial control over financial markets and what happens in the economy as a whole.
Start with financial markets. Although the Fed’s influence comes from its control of the monetary base, it doesn’t directly set a target for that base. Instead, the Fed targets what is called the Federal funds rate, the interest rate at which banks lend to each other overnight. The Federal Open Market Committee, which manages monetary policy, sets a quarter-point wide target range for the Federal funds rate. To achieve this target, traders in New York buy or sell Treasury bills from private banks, thereby increasing or reducing the monetary base.
And what the Fed wants, the Fed gets. Here’s the upper limit of the Fed’s target range compared with the average actual Fed funds rate since the beginning of 2022:
The Fed, then, effectively controls the Fed funds rate, which feeds quickly into other short-term interest rates like the interest rate on 90-day Treasury bills. But can the Fed move the economy as a whole? Sometimes.
The classic example of how powerful the Fed can be is what happened under Paul Volcker, who was Fed chairman from 1979 to 1987. Volcker came in determined to bring the high inflation of the 1970s under control. To that end he oversaw a sharp reduction in the rate of growth of the monetary base, followed by a partial loosening of policy in mid-1982 (shaded areas represent official recessions):
Volcker’s tight-money policy caused a steep rise in unemployment and a large fall in inflation. When he loosened the reins, unemployment plunged — it was Morning in America™:
The Fed doesn’t always have as much power over the economy as it did in the Volcker years. After the 2008 financial crisis it cut the Fed funds rate to zero, but even that wasn’t enough to produce a rapid economic recovery. It turned to quantitative easing — large purchases of long-term bonds, which still had positive interest rates — in an attempt to gain traction. To this day it’s controversial how effective quantitative easing was. I personally am a skeptic, but even those who have a more positive view generally acknowledge that the effects were limited, as evidenced by the sluggishness of recovery (of which more shortly.)
And it’s notable that the sharp increase in interest rates beginning in 2022 — from zero to 5.5 percent over the course of 18 months — didn’t cause a recession. I’ll also talk about that disconnect in a minute.
Still, Fed policy can be hugely important. And unlike fiscal policy — changes in taxes and spending — monetary policy can change rapidly. There’s no need to pass legislation, put contracts out for bid, and all that. All it takes is a phone call: The Federal Open Market Committee tells the open market desk in New York to hit a new target, and it happens.
But what is the Fed trying to achieve? What are its goals? And is it doing policy right?
The Fed’s objectives
The Federal Reserve Act directs the Fed to conduct monetary policy “so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” There are three goals listed there, but the Fed’s mission is generally referred to as the “dual mandate,” because everyone believes that if it achieves full employment and price stability, long-run interest rates will take care of themselves.
The Fed interprets both elements of its mandate somewhat loosely.
The U.S. economy can, for brief periods and under some conditions, run extremely hot. During World War II the unemployment rate fell to 1.2 percent! But the Fed seeks to achieve something less radical, something like maximum sustainable employment. When the Federal Open Market Committee meets, its members make long-term projections of unemployment and inflation that can be seen as statement of what they think can be achieved; the most recent projections put the long-run goal for the unemployment rate at between 4 and 4.3 percent.
What about price stability? You might think that this means zero inflation. In fact, however, the Fed, along with many other central banks, has adopted a target of 2 percent inflation, also visible in those FOMC projections. The Fed believes (and I agree) that a little bit of inflation in effect lubricates the economy, making it easier to adjust to shocks. But it wants to keep inflation low enough that people don’t think about it much and don’t use up valuable resources in an attempt to protect themselves against the consequences of inflation. Also, a history of low inflation makes it easier to convince both producers and consumers that sudden spikes in inflation are temporary. This credibility, as I’ll explain in a future post, was extremely helpful during the high-inflation episode from 2021 to 2023.
Observant readers may have noticed that the Federal Reserve has two objectives — maximum employment and stable prices — even though it basically has only one tool, the level of short-term interest rates. Some critics of the Fed — including Kevin Warsh, who Donald Trump has nominated as the next Fed chair — have harshly criticized the dual mandate and argued that the Fed should have only one goal, price stability.
However, experience during the decade following the 2008 financial crisis strongly suggests that focusing only on inflation would be inadequate. Average inflation between the end of the acute financial crisis in mid-2009 and the eve of the Covid shock was 1.5 percent, slightly below the Fed’s target, but only slightly. If the Fed had focused only on inflation it might have concluded that the economy was doing well over the whole period. But the unemployment rate was far above its long-run sustainable level — implying that the U.S. was far short of maximum employment — until late 2017:
This shortfall in employment wasn’t just a number. It meant that for many years millions of Americans who could and should have been gainfully employed, weren’t, causing personal hardship as well as loss of income. Those workers could have produced trillions of dollars’ worth of output. So the failure to meet the Fed’s employment mandate had a huge economic and social cost — a cost that would have been invisible if the Fed’s mandate had been limited to price stability, full stop.
This doesn’t mean that it would have been easy for the Fed to achieve its employment mandate, although it arguably could have done better.
Notice that in defending the dual mandate I am also critiquing the Fed: Although the Fed was quite aggressive after the 2008 crisis in trying to achieve its employment mandate, I’m suggesting that it wasn’t aggressive enough.
But now a harsh critic of the Fed is about to be put in charge of the institution, and Kevin Warsh’s criticism is almost exactly the opposite: That the Fed did too much to promote employment. He has, in fact, argued that the Fed should focus on price stability, full stop. He has also argued not just against quantitative easing but against the very-low-interest-rate policy the Fed adopted after the financial crisis.
Much of what Warsh is currently saying is the same as what he and many other conservatives were saying as far back as 2010, when opposition to Fed activism became a rallying cry on the right. Back then, however, criticism of the Fed, by Warsh and others, centered on warnings that low rates and quantitative easing would lead to surging inflation.
The inflation they predicted didn’t happen: the inflation spike of 2021-3 was more than a decade later, and the debate over the Fed’s role in that spike is quite different. More next week.
Warsh, however, is still harshly criticizing low interest rates and quantitative easing. He’s just offering completely different reasons for that criticism.
I could go on, but this has been a fairly intricate post, and laying out the current state of debate over the Fed would make it far too long. So I’ll continue this discussion next week.
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I’ve long said Dr. Krugman should have been appointed either as Fed chief or Secretary of the Treasury. Sadly, we have the likes of Warsh to look forward to. Another toady for Fat Hitler.
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Expecting TRUMP to nominate anyone but a TRUMP TOADY is foolhardy. Once he is gone we are going to have to have a wholesale cleaning at the DOJ, the Fed, the FCC, the FBI. It’s going to be a mass turnover. The good news is that not that much useful institutional knowledge will be lost, since those folks already left because they couldn’t stand TRUMP.
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I know, with the Cabinet, their resignations are submitted at the point of the inauguration, but I don’t know what happens with the agencies.
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No matter the position, Trump only nominates people who will be beholden to him.
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Economic Experts Skeptical Trump Fed Chair Pick Will Be Free from Political Influence
Well, um, er, DUH???!!! Not “skeptical,” it is self-evident! WTF???
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