On Friday, the newly appointed chairman of the Federal Reserve delivered a speech that revealed a growing civil war within the administration and may have put him on a “collision course” with President Donald Trump. This is according to the American Conservative, which explained on Tuesday how the fight over economic policy is headed toward a “showdown.”
“Kevin Warsh gave his first major speech as chairman of the Federal Reserve on August 28 at this year’s Jackson Hole Economic Policy Symposium,” writes the American Conservative. There Warsh offered “clues about the Fed’s future direction — as much as he might prefer not to — and perhaps even set himself on a collision course with President Trump.” As the magazine elaborates, Warsh has gone to “war” against the concept of “forward guidance,” which is “Fed slang for broadcasting monetary policy moves well in advance” and has been regular practice over the past two decades. While Warsh explained that it was “intended to maintain calm in the markets during economically tumultuous periods,” he “believes it has overstayed its welcome, as markets have become too reliant on this information, locking the central bank into whatever policy it foreshadowed regardless of subsequent changes in circumstances.”
“As he noted at Jackson Hole last week, forward guidance can in fact lead markets, businesses, and households astray, obstructing the ability of policymakers to make rate decisions based on hard data,” writes the Conservative. “Emphasizing the need to find the proper relationship between financial markets and the Fed, Warsh added that: ‘The Fed needs clear market signals, as unfiltered as possible from market internals: the level and change in asset prices across sectors, the prices and trading volumes of Treasury securities, the foreign exchange value of the dollar, the cost and availability of credit, and the price of a broad set of commoditie.’”
The Conservative notes that “In the reference to Treasury securities, one cannot help but see a jab at Treasury Secretary Scott Bessent’s recent maneuvers. In August, the national debt rose to exceed $40 trillion, while 30-year Treasury yields jumped to almost two-decade highs. The increasing burden of the debt on government financing has pushed up interest rates, as buyers price in the risk of non-payment. By buying back some of these long-term bonds, Bessent hopes to bring down yields on the long end of the yield curve (the normally upward sloping curve showing the difference between short- and long-term bond yields) and thus lower borrowing costs for the government.”
That effort failed, and Warsh is now making it clear that he is “against distorting such an important signal as the Treasury yield.” According to the Conservative, “Warsh has continued to highlight the central bank’s focus on price stability over the employment side of the dual mandate. In his Jackson Hole address, he characterized the labor market as ‘stable,’ and spent considerable time digging into the various inflation indicators that remain concerning. He reiterated that ‘the responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank. And that is where it belongs.’”
Financial experts interpreted this as a sign that rate hikes are on the way, which is exactly the opposite of what Trump wanted when he appointed Warsh to the Fed. According to the National Conservative, the president has pushed for rate cuts despite high inflation. So far he has blamed the “very political” Fed board for resisting his demands, saying that “Kevin is fantastic,” but if Warsh raises interest rates as expected, it would “place him directly in the president’s crosshairs.” At the same time, however, “posturing as an advocate for rate maintenance or cuts will likely undermine his credibility with markets.”
“To maintain his inflation hawk credentials,” the magazine concludes, “Warsh may have to upset his president.”
