"We are an independent central bank for a very long time. We will continue to be an independent central bank today. And you will not see any change in that." The Fed Chairman stated this clearly. Kevin Warsh, participating in the panel on monetary policy with ECB President Christine Lagarde, at the Sintra forum, in Portugal.
A dry answer aimed at reassure the international community in his first trip outside the United States since he took over as head of the U.S. central bank. Two days ago, the U.S. Supreme Court affirmed the same principle. preventing President Donald Trump from firing Governor Lisa Cook.
The tycoon will therefore be able to continue trying, but the Fed is untouchable. And in case the message wasn't clear enough, Warsh added: “If anyone in the household, business or financial markets thinks this central bank is willing to accept inflation above 2%, Well, I think he will be disappointed: we intend to ensure price stability in the United States,” he said, explaining that in any case “inflation expectations in the first four months, or rather in the first four weeks of this period, have decreased; also inflation risks have reduced”.
Warsh: "IA Boom Could Impact Monetary Policy"
During his speech, Warsh talked about the huge amount of investments that big tech companies are pouring into theartificial intelligence, a boom that “is changing the economy U.S. and could have important implications for monetary policy, although it is still too early to fully assess its effects on inflation,” said the Fed chairman.
“In the United States the AI shock is producing an investment boom"Warsh said, noting that for now the effects are visible mainly on the demand side, but that they will also be reflected in supply in the future. The Fed chairman explained that the central bank is closely monitoring these developments to see if they will end up fueling inflationary pressures. "If the economy's supply side expands, this will have enormous implications for monetary policy" he said, specifying however that he did not want to preempt assessments before the next FOMC meeting. Warsh also argued that he prefers an environment characterized by strong productive investment rather than the financialization observed in the past.
Warsh: "Interest rates must return to being the primary tool; the Fed's balance sheet will have to shrink."
Warsh then reiterated that he wanted to bring interest rates back to the center of monetary policy and to be in favor, in the long run, of a reduction of the central bank's balance sheet"It's no secret that since 2011 I've believed the Fed's balance sheet should be smaller," he explained. In his view, "interest rates should be the primary tool through which we conduct monetary policy," while recourse to the central bank's balance sheet should be reserved for times of crisis.
Warsh recalled that the Fed has established a working group composed of outside experts to also review the role of the balance sheet in the conduct of monetary policy. "If there are changes in balance sheet policy, they will be decided collegially by the FOMC and the Board, will be publicly discussed and will not be implemented until the markets fully understand the direction taken,” he said, ruling out a rapid reduction. “It took about 18 years to reach a balance sheet of this size. It will certainly take more than 18 weeks to bring it back to a more modest size,” he said.
Warsh: "The Fed should return to fundamental principles, and Lagarde is right about forward guidance."
The Federal Reserve is embarking on a review of its monetary policy framework returning to the “fundamental principles” and also relying on outside experts, Warsh said during his speech. "This is a unique moment to return to fundamentals, ask ourselves difficult questions, and reassess what we're doing at the Fed," he said.
The president explained that the U.S. central bank has established five external working groups, whose members will be announced next week. "We sought out the best minds in the economics profession, including academics, market participants, and experts, including from countries outside the United States," he said, adding that the findings could also be useful to other central banks.
The number one of the Federal Reserve then expressed full support for the ECB's decision to abandon forward guidance, stating that the US central bank also intends to pursue a more flexible and data-driven approach. “I liked Christine Lagarde when I met her 20 years ago, when she was finance minister. After this answer, I adore her,” he said, referring to the ECB president's explanations for abandoning forward guidance. “I couldn't have said it better,” he added.We will chart a new course to be able to make better decisions and do the right thing.”
The Fed Chairman also reiterated that he did not want to provide advance indications on upcoming rate decisions. When asked if a a rate hike in July was possibleWarsh avoided giving any further details. "We'll still have a lot of data before the meeting," he said, adding that the FOMC will have "a good discussion" at its next meeting, without prejudging the outcome.
