Intellectually, at least, today’s Warsh appears the same as the one of 2010. In his IMF lecture delivered in April 2025, he stressed not only the Fed’s “institutional drift”, but also its recent “failure to satisfy an essential part of its statutory remit, price stability. It has also contributed to an explosion of federal spending. And the Fed’s outsized role and underperformance have weakened the important and worthy case for monetary policy independence.” He made other criticisms, the most pointed being that “the Fed has been the most important buyer of US Treasury debt — and other liabilities backed by the US government — since 2008”. He asserts: “Fiscal dominance — where the nation’s debts constrain monetary policymakers — was long thought by economists to be a possible end-state. My view is that monetary dominance — where the central bank becomes the ultimate arbiter of fiscal policy — is the clearer and more present danger.” For Warsh, then, easy money is the road to ruin.
Yet worries remain, on two fronts. The first is that Warsh might be far too willing to argue for whatever Trump wants, even though this would mean accepting fiscal dominance, in spades. It also appears that he intends to justify doing so by offsetting lower short-term rates with higher longer-term ones, as the Fed’s balance sheet is aggressively shrunk. At the same time, the US Treasury is likely to shift further towards short-term financing. With a more strongly upward-sloping US yield curve, the likely outcome would be greater demand for dollar financing at the short end, and less demand at the long end. Above all, given the decline in banks’ reserves and financial deregulation as well, the balance sheets of the financial sector would become more fragile. The incentive to hold the dollar might also fall, as short rates decline and fear of inflation jumps. The result might be another financial crisis.
Reading the runes on a Warsh Fed
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