Based on reports surrounding his potential nomination by Donald Trump in January 2026, Kevin Warsh would likely reform the Federal Reserve by pushing for a "regime change" in policy, focusing on smaller balance sheets, lower interest rates, and closer coordination with the Treasury Department. He has criticized the Fed under Jerome Powell for missing the inflation surge and for allowing the institution to expand its mandate into non-monetary areas like climate change and diversity.
Here is how Kevin Warsh would likely reform the Fed:
1.
Drastic Reduction of the Balance Sheet
Shrinking
Footprint: Warsh has long argued that the Fed should maintain a small
balance sheet and has been a critic of "quantitative easing"
(bond-buying programs).
Accelerated
QT: He supports reducing the Fed's holdings of government bonds and
mortgage-backed securities to reduce the central bank's footprint in financial
markets.
Theory: Warsh believes that shrinking the balance sheet (reducing the "printing presses") would allow the Fed to maintain lower, more stable interest rates without triggering high inflation.
2.
Lower Interest Rates
Supporting
Growth: Contrary to his earlier, more hawkish reputation, Warsh has
recently argued in favor of lower interest rates to boost economic growth.
Alignment with Trump: This stance aligns with the Trump administration's goal of significantly reducing borrowing costs to stimulate the economy.
3.
Closer Coordination with the Treasury (New Accord)
Revamping
the 1951 Accord: Warsh has called for a new "Treasury-Federal Reserve
Accord" to better align monetary policy with fiscal policy.
Coordinated Strategy: He advocates for the Fed Chair and the Treasury Secretary to work more closely to manage the balance sheet and the national debt.
4.
Narrowing the Fed's Mandate
Focus
on Core Mission: Warsh has argued that the Fed has strayed from its core
mandate of price stability.
Ending "Mission Creep": He has criticized the Fed under Powell for engaging in social and environmental issues—such as climate change and diversity, equity, and inclusion—arguing these are outside the Fed's purview.
5.
Increased Accountability and "Regime Change"
Critique
of Competence: Warsh has stated that the Fed's policy "has been
broken for quite a long time" and that the current Fed holds a
"credibility deficit".
Downsizing
Staff: He is likely to support reducing the staff and size of the Federal
Reserve.
Context on "Independence": While Warsh has historically called the Fed's independence "precious" and "essential," he has also suggested that it should not operate completely autonomously and has criticized the current Fed for using its independence as a "shield" against accountability. His approach would likely represent a major shift toward closer alignment with the executive branch's economic goals.
Kevin Warsh's proposed reforms for the Federal Reserve focus on a "regime change" in monetary policy that emphasizes a smaller balance sheet, clear exit rules for emergency actions, and a return to the Fed's core mandate of price stability. He argues that these changes would allow for lower interest rates and restore the central bank's credibility and independence.
Key Reforms and Proposals
Shrink the Balance Sheet: Warsh is a staunch critic of the Fed's expanded balance sheet (quantitative easing, or QE) and advocates for significantly reducing its size through quantitative tightening (QT). He argues that this would give the Fed more flexibility to manage short-term interest rates.
Lower Interest Rates: He believes that by controlling inflation through balance sheet reduction, the Fed could ultimately achieve sustainably lower interest rates to support the real economy, including households and small businesses.
Restore the Core Mandate: Warsh criticizes the Fed for "institutional drift" into areas outside its purview, such as climate change and diversity initiatives, arguing this jeopardizes its operational independence. He stresses a return to the statutory goals of stable prices and full employment.
New Treasury-Fed Accord: He has called for a revamp of the 1951 Treasury-Fed Accord to ensure closer coordination between the two bodies on managing the size of the Fed's balance sheet and government debt issuance.
Enhance Accountability and Transparency: While advocating for operational independence in monetary policy, Warsh also calls for greater accountability, suggesting that current "forward guidance" has little role in normal times and that the Fed needs to be more direct about its policy choices.
Embrace Productivity Gains: He is a proponent of the disinflationary potential of technology like artificial intelligence, suggesting that productivity improvements should be a key consideration in policy setting and could lead to higher real wages.
Market Discipline: Warsh believes in resurrecting market discipline in prudential supervision, arguing for a system where even large, insolvent firms can fail to avoid creating moral hazard and ensuring market signals are not distorted by the expectation of government bailouts.
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Comments
Interest Rates will be reduced including interest on the Federal Debt and Home mortgage rates.
Norb Leahy, Dunwoody GA Tea Party Leader
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