For nearly two decades now, politicians in Washington, D.C., have assigned the Federal Reserve a growing portfolio of missions, including dealing with climate change, racism, expanded banking regulation, and consumer financial protection. A lot of that was probably done to avoid the federal government having to pay for it, but adding these many mini-missions to the Federal Reserve’s already difficult portfolio was absurd. President Trump’s nominee to the position of Federal Reserve Board Chairman, Kevin Warsh, isn’t a fan. The Cato Institute’s Jai Kedia discusses Warsh’s feelings about reining in the Fed, writing:
Warsh’s best and most consistent policy view is his opposition to quantitative easing (QE). He served on the board of governors when the Ben Bernanke-led Fed began this large-scale asset-purchase program. Despite voting with Bernanke for the program, Warsh expressed concern that an expanding Fed balance sheet would distort financial markets — prescient given the Fed’s further rounds of QE since and its deleterious effects. Warsh has continued to advocate for a smaller balance sheet that would allow monetary policy to revert to its pre-2008 system that, while imperfect, is far better than now. As it stands, the Fed is currently around 30% the size of all U.S. commercial banking.
Warsh has also criticized the Fed’s mission creep, and he’s right to do so. The Fed cannot fix everything, and trying to do too much only serves to detract from its core mission. He has criticized the Fed’s foray into political issues like climate change and its now-infamous reinterpretation of maximum employment as a “broad-based and inclusive goal.”
Doubtless, as Fed chair, Warsh will be pressured by politicians to help with ballot-box issues. He should stand firm on principles and reject Fed involvement. Crucially, this also means standing up to the president, who wants the Fed to reduce the exorbitant interest expenses resulting from the national debt. But that is not the Fed’s job — the government must cut spending and not look to the Fed.
The Fed’s ever-expanding role as a financial regulator has also detracted from its monetary-policy objectives. Warsh has criticized the regulatory regime which restricts U.S. banking with a convoluted and overly intrusive set of rules, recently stating that the “Basel endgame isn’t America’s endgame.” The Fed does not need to be a regulator to conduct monetary policy and at least two other federal financial regulators (the OCC and FDIC) can subsume the Fed’s regulatory powers. Warsh should fight against the Basel regime in favor of a simpler, less burdensome system.
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