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Kevin Warsh has homed in on three key phrases. How Fed watchers interpret them
He's not quite at the level of obscurity of former Federal Reserve Chairman Alan Greenspan, but new Fed chief Kevin Warsh has settled on a few phrases that are notable for their repetition and lack of clarity.
In five public appearances, starting with his nomination hearing in April, through his first press conference, roundtable in Portugal and two congressional testimonies, Warsh has used the phrase "family fight" 13 times, returning to "first principles" 11 times and "inflation is a choice" for the Fed six times.
But what those phrases mean for monetary policy is more challenging than counting their usage. Yet, with a chairman who has decided to say less than his predecessors, there's a premium on understanding the words he does choose.
CNBC asked five close Fed watchers their views on what these three phrases mean to them.
"If Chair Warsh encourages more open debate around policy and creates an environment where prevailing assumptions can be challenged rather than simply accepted, that should ultimately lead to better policymaking. The benefit is less about changing the outcome of any individual meeting and more about improving the quality of the decision-making process over time."
"Ensuring the environment at the [Federal Open Market Committee] meeting allows for all views/arguments to be heard. I note that this was already the atmosphere when I was on the FOMC. I never felt constrained in what I said or the policy case I argued. In reality, it is 19 people around the table so there has to be some order or else maybe it is only the loudest voice in the room that gets heard and you will actually have fewer views expressed since it will be hard to jump in."
"FOMC meetings tend to be highly scripted affairs, with prepared remarks read aloud and limited conversation. Warsh wants a livelier back-and-forth — a style he is more comfortable with. The format is unlikely to affect the policy decision, and 19 participants is a large group for a free-for-all conversation. "
"To Kevin, this is his aphorism for the natural debate going on inside the FOMC and the Board. It implies obvious disagreements, but like all 'family fights' is best kept to members of the family and not revealed too much to the public. I think it's the second part that his committee colleagues (and market participants) are finding problematic, and doesn't fit the priors. Members of the committee are clearly willing to disagree in public, or at least state their opinions much more openly (than Chairman Warsh). It's also a way of deflecting his responsibility from external pressure (POTUS, CONGRESS, MARKETS)."
"I guess the family fight is him trying to be folksy, but it doesn't depart from the tradition under [Ben] Bernanke of (publicly) welcoming dissenting opinions."
"This is vague enough to mean whatever Warsh wants it to mean, but in context, it appears to be the basis for the decision making and structural reform he is manifesting. Over the summer (in Sintra) he said his Central Banking leadership colleagues shared a 'willingness to go back to first principles' as he questioned the whole process of monetary policy making. I'd think his re-introduction of the monetary aggregates, his cute "monetary policy should have something to do with money," is cut from the same general cloth as 'first principles.' Sadly, the science of monetary policy and other workhorses of monetary policy (The Phillips Curve), economic forecasting even appear to be unhelpful in Warsh's first principled approach. He's not been shy about slamming the year-after-year misses in inflation and blaming [Jerome] Powell and company. The low level of interest rates, the balance sheet, the failure to tighten sooner, FAIT and so on, all of that (to Warsh) was a departure from 'first principles.'"
"'First principles' is code for 'question everything.' Warsh has said repeatedly that he wants "regime change" at the Fed and questioning the basic assumptions of how monetary policy is done fits that agenda. I am skeptical that Warsh will be able to rewrite first principles. Showing that an assumption is flawed is not enough; it requires offering a better replacement. Even with his task forces, Warsh is likely to come up short on new first principles — no regime change in monetary policy, but some incremental improvements to how it's done."
"Rethink the way the Fed goes about achieving its dual mandate goals of price stability and maximum employment without preconceived notions or assumptions, or precluding approaches because they may differ from the current approach. Think first about what the best approach is for communications, inflation and labor market assessment, balance sheet and operating framework, and data sources. Then consider how to transition to these new approaches."
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