Economists are questioning the monetary policy of Kevin Warsh, chairman of the U.S. Federal Reserve, as the country faces economic challenges including a record national debt, long-term interest rates at a 19-year high and a tariff war with Canada.
In a survey of academic economists conducted by the University of Chicago's Booth School of Business and Britain's Financial Times, about 60% of respondents said the Fed now needs more time to bring inflation down to its 2% target than it did when Warsh took office, according to the FT on the 24th.
Based on the July Consumer Price Index released on the 12th, the U.S. annual inflation rate stands at about 3.4%. Inflation has run above the Fed's 2% target for more than five years. Higher oil prices from the war in Iran, along with President Donald Trump's recent threats of steep tariffs on Canada, could add further inflationary pressure.
"Chairman Warsh's reluctance to offer a clear, public assessment of the current state and outlook of the U.S. economy is fueling anxiety," said Christiane Baumeister, a professor at the University of Notre Dame. "This can breed unnecessary speculation and undermine stability, while raising concerns about the Fed's credibility."
More than 60% of respondents also said that concerns over the Fed's credibility had a very large or considerable impact on the rise in long-term interest rates since Warsh's nomination in January. The debate over the Fed's independence has persisted as Trump clashed with former Fed Chairman Jerome Powell, who did not comply with his demands for rate cuts. As a result, many had predicted that Warsh, then a candidate for the chairmanship, would run monetary policy to Trump's liking.
The FT reported that about 75% of respondents cited Warsh's departure from his predecessors' open communication strategy as the most significant change he has made since taking office. Warsh has signaled his intention to communicate cautiously with markets, mentioning the elimination of forward guidance and refusing to submit the dot plot that shows the medium- to long-term path of interest rates.
Experts are divided over these changes, however. Eric Rosengren, a former president of the Federal Reserve Bank of Boston, said Warsh may refrain from discussing future policy decisions but should explain the decisions he is making now, noting that "the current communication strategy is causing a decline in the Fed's credibility."
Others offered positive assessments. "The Fed has done real harm to the functioning of capital markets by getting increasingly involved in micromanaging them," said Deborah Lucas, a professor at the Massachusetts Institute of Technology (MIT). "Warsh is trying to push back against the entrenched interests of the existing system and reverse this, and I give him high marks for that."
Jon Faust, a researcher at Johns Hopkins University and a former adviser to Powell, said Warsh "has essentially overcome fears that he would become Trump's puppet, and he hasn't caused chaos inside the Fed," adding that "some of the worst-case scenarios that had been feared have been fairly firmly ruled out." In the FT survey, 75% of respondents also said Warsh's overall performance since taking office had broadly met their expectations.
Warsh will deliver his first keynote address since taking office to central bankers and economists on the 28th at the Jackson Hole economic policy symposium hosted by the Federal Reserve Bank of Kansas City. Markets are focused on his remarks regarding interest rates.
