Former Fed governor Kevin Warsh is apparently in the running to be the new Fed chair when Presidente Trompe kicks Yellen out of the seat for being a Democrat in 2018.
According to Tim Duy, that partly explains why Warsh has recently resumed his bad habit of stinking up the WSJ op-ed page with pointless thought pieces.
Tim Duy does yeoman service going through each of Warsh’s claims in the op-ed and sorting them between wrong and not applicable. That must have been tedious work for Tim, because I assume it is more fun to just let your own ideas rip. But I guess it is good somebody is staying on top of these guys. No. Wrong. Factually incorrect. Incoherent. Ok, now you’re just making shit up. False. She didn’t say that.
I don’t have much to add to Tim’s piece, but maybe just a bit to subtract. Warsh chides the Fed for not having a “strategy” to achieve its objectives, which is a bit odd because Warsh wants the Fed to change one of its objectives so that it will retroactively have achieved it. (If they can’t hit 2% inflation, then why not go for a range of 1-2%? *) Tim responds that the Fed has a strategy, but that Warsh “just refuses to see it.”
I know what Tim is getting at. Warsh is intentionally mischaracterizing the Fed leadership so that he can criticize it. But I don’t think the Fed’s strategy is obvious, because the Fed leadership has decided to depict that strategy as more systematic and less ad hoc than it actually is.
FWIW, I don’t have a problem with the ad hoc approach: it is better to recognize that you don’t really know what you are doing than to act like you do. This is macro and it is not like things are all settled. But the Fed has been telling fibs, and these noble lies have begun to pile up to the point where people are noticing.
For example, as I have mentioned a couple times, for some reason the Fed leadership likes to pretend that they are being guided by Taylor-type policy rules but that the appropriate estimate of the neutral rate of interest to apply within them has been shifting. I would rule that interpretation out on Occam’s Razor grounds and because Taylor-type rules cannot be applied near the zero bound. Yellen occasionally, including most recently, hints at the latter issue, but just not forcefully enough for my taste.
I was pleased, then, to see these two authors at Vox make the point that the neutral rate of interest is a useless guide to the conduct of monetary policy, although they do not share my take on Taylor-type rules more generally. I would add that Yellen is aware of this issue with the neutral rate and that her whole discussion is a deflection.
This fits into a broader pattern of obfuscation. So maybe Tim dwelt a bit too heavily on the idea that the Fed has a strategy that any honest person could easily see. Admittedly that is a minor point. I don’t want to just link to Tim and say read this. Where is the fun in that?
Beyond that I have a couple half-baked thoughts on Kevin Warsh, which probably aren’t worth much, but I will throw them on the wall anyway.
- I don’t really understand why Kevin Warsh wants to be Fed chair. They say that job is the second most powerful in DC. But I am not in that camp, because the Fed chair’s marching orders are pretty clearly determined by other people. The Fed chair has a privileged ability to work on economic puzzles and then to act on the solution he or she comes up with. That would seem to appeal to somebody with a background in economics, rather than whatever background Kevin Warsh claims to have. I met him once. He seems mostly like a smooth talker, and I might have detected him dialing up a southern accent for effect.
- If Warsh were Fed chair, would the organization respect him? He would have gotten the job in part by mischaracterizing what the Fed does and arguably arrogating a position that should have gone to a more talented and dedicated student of monetary economics. Normally the staff and governors assume the chair knows the broader sitch better than they do. That would not apply in Warsh’s case, so it could be weird that way.
- I wonder if that might make Warsh less bad than, say, John Taylor. Taylor has a strong academic pedigree and can speak with authority on monetary policy issues. I think what he says with that authority is dangerously wrong, but it is not like he would fail to command respect. Maybe it would be better to have an airhead that sensible people could more easily push around? In this regard, Warsh might have one of my favorite attractions of a liberal. We liberals know we don’t know. Therefore, we have no no principles, but do have a 50% chance of accidentally doing the right thing. That is a pretty high batting average for government work. Conservatives, in contrast, are solemnly committed to doing stupid shit. In fact, they take pride in acting on little to no information, as Trump did in Yemen. They call that being “decisive.” Warsh might turn out to be a good liberal in the sense of the term implying weakness.
* Warsh confuses two issues here. First, he wrongly implies that the Fed is slavishly committed to hitting precisely 2% over some horizon, rather than on average over time. To get around this non-issue, he proposes a range, which is redundant. Second, he then makes the center of the range 1.5%, rather than 2%. But he does not explain why he wants to lower the inflation objective. Tim says it would just give Warsh a reason to raise interest rates. It is nothing beyond that. That would fit, so maybe. To me, the simpler point is that Warsh is confusing issues.