A new Federal Reserve Chairman has the potential to radically re-shape the way monetary policy is conducted in the U.S.- but, what’s the real story?
Revolution at the Fed?
A chorus of powerful men is calling for revolution at the Fed. David Malpas, former World Bank president being one of the most notable.
It’s not controversial anymore, the Fed is broken.
Jerome Powell’s time is up- a new Fed chair is coming soon. This past Tuesday, Kevin Warsh sat before the Senate Banking Committee for his confirmation hearing to become the next chairman of the Federal Reserve.
Outside of the typical political food fight, the most substantive part of the day was Warsh’s unusually blunt assessment of where the Fed has gone wrong and what he thinks needs to change.
Warsh called the ‘policy mistakes’ of 2021 and 2022 a “fatal policy error”. He said the kind of loose, reactive approach that oversaw M0 money supply increasing by over 85% and leaving inflation running red hot, left households and businesses still paying the price years later.
He criticized the Fed for enabling reckless fiscal policy from the Federal Government and its ridiculously large deficits.
M0 Money Supply (monetary base) – Percent Change from February 2020 to February 2022, and the end of balance sheet expansion.
His proposed fix?
A full “regime change” as he called it: a narrower focus on the core dual mandate of price stability and maximum employment, a fresh inflation framework (different metrics), far less reliance on unconventional tools, and a meaningfully smaller balance sheet.
“A SMALLER BALANCE SHEET?!”
The Reverse Money Printer
That last point matters. For more than a decade the Fed has leaned hard on quantitative easing (“QE”)- massive rounds of Fed money printing to buy financial assets from the banks that effectively printed trillions in new reserves to keep markets afloat and rates suppressed.
During the response to COVID, the Fed printed $3 trillion in bank reserves- just created out of thin air.
During the ongoing responses to the GFC, the Fed printed $3.2 trillion in bank reserves.
Remember, when the Fed …