Kevin Warsh, the presumptive heir to Jay Powell as Federal Reserve chair, gave a speech last Friday acknowledging “new interest in my views” and delivering a stinging attack on the US central bank’s actions since he resigned as a governor in 2011. Too much quantitative easing, a willingness to accommodate lax fiscal policy, mission creep in going green and helping the poor had led to the recent inflation, he said. That and other failings had left the Fed licking its wounds, nursing lost credibility and “generating worse outcomes for our citizens”.
Warsh said his speech was a “love letter” to the Fed. But when someone says that the world’s problems come from “inside the four walls of our most important economic institutions” and talks of US central bankers as “pampered princes” that deserved “opprobrium” for failing to contain inflation, it does not sound entirely constructive to my ears.
Of course, this was a job application. So let’s constructively critique the speech and ask what a Warsh-led Fed would look like.
The good, the exaggerations and what was missing
I have an enormous amount of time for much of the critique Warsh was making. Central bankers need humility, should not be pampered in public life, require robust oversight and, indeed, opprobrium if they err. There has been a pervasive tendency in these institutions, not just in the US, to pass the buck on the recent inflation. There has been mission creep into areas outside central banks’ core functions, which undermines both their legitimacy and democracy itself. Warsh was entirely correct to criticise central bankers’ choosing to promote group interests ahead of their mandates to control prices.
But we should not exaggerate these problems, as Warsh clearly did. When there is a US president blowing up the postwar, rules-based economic system and the world has suffered a once-in-a-century pandemic, it is just weird to say the main problems come from within economic institutions such as the Fed.
Even though Warsh is correct to chide central bankers for denying that the purpose of quantitative easing was to facilitate greater government borrowing and stimulus, he is simply wrong to say that Fed officials “did not call for fiscal discipline at the time of sustained growth and full employment”. Powell has repeatedly said US fiscal policy is “on an unsustainable path . . . and we know we have to change that” (26 mins 55 seconds, for one example).
Warsh cites the Fed’s following of fashion on environmental concerns as something that has undermined its legitimacy. But the Fed being a member of the Network for Greening the Financial System between 2020 and 2025, a body that has done precious little, is barely a misdemeanour, and has had no effect on its credibility.
And when put to the financial market test over the past two weeks, far from the Fed needing to “mitigate losses of credibility”, it has been the executive branch of the US government — and in particular, the president — whose credibility has been shown to be deficient.
Exaggerations are inevitably part of a polemic and understandable in a job application. More concerning was what was missing. Warsh made no attempt to paint an analytical counterfactual apart from to assert that the world would be better now if the Fed had not made all the mistakes he outlined. How much higher would interest rates have needed to rise in 2020 and 2021 to offset government spending and curb inflation? Would this have worked? Are all the analyses that suggest the price rises were impossible to avoid without unacceptable trade-offs wrong? Why?
There was no attempt to address these questions.
Hawkish heir
So what would Warsh’s Fed look like?
The first conclusion must be that it would be more hawkish. Donald Trump might not know this, but Warsh is with the public on inflation. He hates it and would not want it on his watch.
Second, it would be more limited in its scope. This would keep the Fed glued to its mandate — and that would be welcome.
Third, it would probably be more transparent. Warsh conducted an exemplary review of Bank of England transparency in 2014, which has stood the test of time.
Fourth, and this is my supposition, a Warsh-led Fed would start off with the certainties of his speech, but soon find that ambiguities, nuances and trade-offs were in order.
What does the IMF expect from tariffs?
I have always found it more useful to discuss the things we actually know and the way we think about uncertain events, rather than just talking about what we do not know. In and around the IMF and World Bank spring meetings, central bankers have been doing just that.
Those outside the US think Trump’s tariffs generally represent a disinflationary shock to demand that will depress spending and output. This seems to be the settled view at present in the European Central Bank, with President Christine Lagarde having said tariffs were likely to be “disinflationary more than inflationary”. BoE governor Andrew Bailey agreed, and talked about a “growth shock”. Bank of Japan governor Kazuo Ueda said he shared the view of tariffs as a jolt to business confidence. With a stagflationary shock to deal with, Fed officials have been understandably more vague.
The IMF had the unenviable job of quantifying the tariff effect on the global economy last week. Its basic position was unarguable. Tariffs would cut growth worldwide and raise inflation in the US.
Fund officials talked up the changes in its forecasts with Pierre-Olivier Gourinchas, its chief economist. They said the world economy had entered a new era with the largest imposition of tariffs in a century, that would “greatly impact global trade” and “slow global growth significantly”.
The most notable dissent from this stance, however, came from the IMF’s own forecasts, which do not tally with these comments.
As the chart below shows, the volume of forecast US goods imports is stable as a proportion of US GDP and rising in real terms every year. Tariffs just are not that consequential in the IMF’s models. In contrast, the Tax Foundation expects US imports to fall 23 per cent.
Sure, IMF officials have told me that its forecasts have goods declining as a share of nominal GDP. But that itself has interesting implications. If the IMF thinks the volume of US goods imports will rise under tariffs, but the value of those goods will rise at a slower rate, the unit price of US imports (excluding tariffs) falls. Evidence suggests otherwise, although this forecast will put the IMF in the Trump administration’s good books.
I don’t want to bang on about IMF forecasts, but I am unconvinced that the following chart demonstrates a “new era” for global trade warnings from IMF officials.
What I’ve been reading and watching
A chart that matters
The chart below shows US customs and excise revenues growing faster this year as a result of tariffs, courtesy of Erica York at the Tax Foundation.
Trump is right that billions in revenues are flowing into the US Treasury, although not $2bn a day as he likes to claim.
He is even more wrong about the tariff revenues being large. Some of the increase will decrease profits, limiting other tax revenues. Tariffs will also deter imports.
Another way to scale the revenues is to estimate an annual total. Let’s say customs duties raise $200bn to $300bn in a full year (higher than most estimates). These pale into insignificance compared with US individual income taxes, which are set to raise $2.7tn.
