Kevin Warsh’s maiden voyage press conference as the new Fed chairman was a masterful performance. He was knowledgeable, succinct, collegial, humble. By the way, so was the Fed’s press release. Short and sweet. My two biggest takeaways were first: the central bank’s emphasis right now is on price stability. Their statement emphasized strong productivity and business capital investment, along with job gains and low unemployment.
By the way, productivity and business investment on the supply-side will be a hallmark of Mr. Warsh’s thinking. Yet inflation is the key target right now. As Mr. Warsh put it: “We recognize that inflation has been running well ahead of the Fed’s long stated inflation goal of 2 percent. That’s been going on for more than five years. Persistently high prices are a burden for the American people.” Mr. Warsh concluded: “this committee will deliver price stability”
Of course if there is a deal with Iran and the Strait of Hormuz is reopened, that’s going to bring inflation down substantially. Already the West Texas intermediate price has fallen over 30 percent to around $76 a barrel. Gasoline prices will soon follow.
It’s not inconceivable that the CPIs for July, August, and September will be negative, which of course changes the whole inflation picture to deflation, which in turn can change the whole interest rate picture from rising rates to falling rates Yet Mr. Warsh did not rule out or rule in any rate hike.
My second big takeaway was the new chairman does not believe in the Phillips curve view that growth causes inflation. This is hugely important, because among other reasons there’s a business boom going on along with the stock market, and productivity, and the A.I. revolution, all in response to low taxes, light regulation, and drill, baby, drill.
Here’s Mr. Warsh on coexisting low inflation and low unemployment at the same time: “I don’t share the view that was expressed a few generations ago, that Federal Reserve chairman showed up at a podium like this and say, you got to choose, and, you’re going to have to decide whether you’re willing to tolerate higher inflation to put more people at work. I don’t believe in that.” Mr. Warsh added that “What I believe is if we do our job, we can make strong growth, low prices and strong employment mutually compatible”
As far as additional Fed reforms, Mr. Warsh is setting up five task forces with people in and out of the Fed on communications, balance sheet, data sources, productivity and jobs, and the inflation framework. This is a smart move, it’s a collegial move, but it also signals that reforms are coming. One key point I especially like was Mr. Warsh’s mini-riff on how markets should be able to react directly to the incoming data, not the Federal Reserve’s forward guidance opinions.
Indeed, Mr. Warsh didn’t even put his own dot into the Fed’s forecast. Very cool. Yet he also talked about how you need improved data collection in our fast-changing super-advanced high-tech economy. Perhaps he’s implying that good news on the economy should just be good news, not bad news because a couple of flyover regional Federal Reserve bank presidents have some whacked out opinion that a prosperous America is somehow a terrible thing, especially, wait for it … under President Trump.
Speaking of good news, today’s report on retail sales was a barn-burner, way above all expectations. So what happened? People started selling stocks because they’re worried about the Fed raising interest rates. Let us hope Mr. Warsh ends all of that illogical thinking.
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