Can Fed’s new chair Warsh pull off a Greenspan?

We’re skeptical that the nomination of Kevin Warsh as the next Federal Reserve chair will have immediate implications for interest rates or balance sheet policy. But given the significant influence the chair has over the direction of research of the Board staff, there’s much greater potential for shifting policy further ahead.

What you will learn:

• Warsh has frequently argued that the current Fed has been overly data-dependent and backward-looking, a criticism that is borne out to some extent by its recent monetary policy lagging recommendations from standard policy rules.
• Warsh appears to prefer a return to a more forward-looking approach, based on the idea that the economy has entered a structural acceleration in the rate of potential economic growth, fueled by AI, among other factors.
• While we mostly agree with Federal Reserve Chair nominee Kevin Warsh’s argument that the economy is in a supply-side expansion akin to the new economy period under former Chair Alan Greenspan, we think the implications for monetary policy are different today.
• If the Fed significantly eased policy into an uncertain supply-side boom, it risks overheating the economy and fueling bubbles that would exacerbate any subsequent economic downturn, creating a boom-bust cycle.