Is Kevin Warsh’s silence the beginning of the end for the Fed?

Kevin Warsh talks out of work. He regularly makes the correct point that markets operate more smoothly when they respond to economic data, as opposed to predicting how the Fed will react to the data. So while Warsh arguably overstates the value of economic data being always a hindsight as it is, the fact that he would seemingly prefer markets not to fear the Fed’s dovish-looking reactions is a seemingly positive thing.

Assuming a do-nothing Fed won’t change much for the same reason that abolishing the Fed wouldn’t make the sun shine 365 days a year, as members of the Austrian School metaphorically promise. The Fed’s power to influence interest rates in one way or another has always been overrated. Evidence to support this claim can be found in Warsh’s interest in the job, get it?

If the Fed really controlled interest rates, as is commonly assumed, the US economy would be too small to matter. This is because central planning always and everywhere fails, and it would be economically destructive if one of the most important values ​​in the world (credit) was controlled by the Governing Heights.

What is the most important price in the world? The dollar. The Austrian School guys who believe the Fed is the source of almost all of the world’s economic ills claim that the Fed controls the value of the dollar which it is supposed to persistently depreciate but does not. And it never has. The exchange value of the dollar was never part of the Fed’s portfolio by design, but also in practice. Specifically, look at 1933 and 1971 when Presidents Roosevelt and Nixon devalued the dollar. They did so in the face of toothless pushback from Fed Chairs Meyer and Burns.

Back at Warsh, his silence is once again wise. See above, but also consider what the Fed is empowered to do. Supervision of banks is required, but history is clear that Fed regulators are always the last to discover problems within banks, which makes sense. If they were usually first, they wouldn’t be at the Fed.

Price stability? The very concept offends market logic. Prices are supposed to be unstable as a reflection of the ever-changing wants, needs and priorities of consumers. Moreover, prices are the highly sophisticated result of infinite decisions made by billions of humans and machines every millisecond of every day. In other words, the Fed could not achieve “price stability” (whatever that is) even if it wanted to.

Interest rates? The Fed is charged with influencing the overnight lending rate between banks and uses resources extracted from the private sector to exert its influence. Except that an overnight lending rate is a price like any other, and hardly required by the Fed.

Lender of last resort? The health of the banking system requires a myriad of private actors to decide which financial institutions survive and which do not. Very simple.

The so-called “monetary policy”. Some were wedded to the hope of Milton Friedman’s “monetarism,” Warsh taking control of the so-called “money supply.” It would be comical if the idea wasn’t so sad: the money in circulation is a reflection of production, nothing else. Imagine the Fed trying to mirror global economic dynamism. As with prices, the Fed could not pursue policies that even Friedman admitted were bogus, even if it wanted to.

It all speaks to why Warsh is right about markets functioning more efficiently without the government intervention that the Fed represents, while also questioning Warsh’s goal here.

If it reveals that the Fed was never necessary and was not, what will become of the future Fed? While it’s hard to believe that Warsh would be the first Fed Chairman in history to laudably shrink the Fed’s overrated reputation, it’s troubling to think where Warsh might turn a central bank he politicized so much to run. Time will tell.