BlockBeats reported on Aug. 24 that Wall Street Journal reporter Nick Timiraos, often described as a key Fed watcher, said Kevin Warsh’s preference for a quieter Federal Reserve was not accidental.
Timiraos wrote that Warsh has long opposed two central Fed communication tools introduced in 2012: the dot plot and the Summary of Economic Projections.
A different reading of inflation
Timiraos said many on Wall Street have cheered Warsh based on his record from 15 years ago and viewed him as a natural inflation hawk. But meeting records and quarterly forecast data released later suggest his understanding of inflation was highly unusual.
In Timiraos’ account, Warsh relied less on traditional demand-side indicators such as unemployment and rooted his thinking more deeply in supply-side conditions and government policy.
His view after the financial crisis
As the 2007 to 2009 financial crisis faded, many of Warsh’s colleagues at the Fed treated 9% unemployment as a sign of economic slack that could restrain prices. Warsh saw something more lasting: structural damage.
He argued that capital was not flowing to the most productive parts of the economy, the labor market had lost its ability to adjust, and unpredictable policy from Washington was making matters worse. If unemployment was structural rather than temporary, it would not hold inflation down.
Some warnings landed, but much later
Timiraos said that, in hindsight, Warsh’s pessimism about the economy’s growth potential was partly borne out. As he had warned, tighter regulatory, fiscal, and trade policies became less supportive of growth and weakened the economy’s productive capacity.
A smaller economy, in that framework, reaches capacity limits faster and becomes more exposed to external inflation shocks. Even so, the inflation crisis Warsh had warned about arrived a full decade later.
Now the question is supply and productivity
Warsh now faces a macro setting very different from the one he confronted before. After five years of above-target inflation, he must judge the economy during a wave of technological disruption whose scale, Timiraos wrote, nobody can estimate precisely.
Over the past year, Warsh has said that artificial-intelligence-driven technological progress could give the economy more room to grow, and that technology tends to lower costs over time.
Timiraos added that, when Warsh was asked last month how he reads the current economy, he returned to the same core problem he described 15 years ago. Warsh said, 「We are inferring aggregate supply. We are making judgments about what productivity is.」