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Martin Wolf, the chief economics commentator at the Financial Times, recently published a cautionary article focusing on Kevin Warsh, who may soon lead the Federal Reserve. The article's title directly poses the question: what exactly are we seeing when interpreting "the Federal Reserve under the Warsh era"?
Wolf is an authoritative figure in macroeconomic research. He has long focused on issues of central bank independence and the boundaries between fiscal and monetary policy, with his views significantly influencing both policymakers and markets following the 2008 financial crisis. This time, he turns his attention to this candidate for Fed Chair selected by Trump, attempting to glean clues about the future direction of monetary policy from Warsh's past statements and recent shifts in stance.
The article begins by posing a sharp question: if confirmed as Fed Chair, would Warsh truly be an inflation hawk, or merely Trump's "lapdog"? This question is not without basis. Warsh's fluctuating statements on monetary policy and his views on the Fed's broader responsibilities suggest a hardline stance. Yet, his recent comments on the inflation outlook, coupled with the fact of his selection by Trump, point in the entirely opposite direction.
A deeper concern lies in whether Warsh is a man of conviction and judgment, or simply a political weathervane. Supporting loose monetary policy under a Republican administration while advocating for tightening under a Democratic one—such "double standards" could pose unpredictable risks to the US and global economy. Wolf warns that under Warsh's policy framework, "the outcome could be another financial crisis."
Judging from Warsh's public remarks, he indeed appears to be a typical "hard money" central banker. Wolf cites a speech Warsh delivered in March 2010 to the Shadow Open Market Committee in New York. At that time, the US economy was still grappling with the deep recession following the 2008 crisis, yet Warsh was already expressing concerns about the Fed's credibility.
In that speech, Warsh put forward four core points. First, Fed independence applies only to monetary policy, not to "regulatory policy, consumer protection, or other duties conferred upon the Fed." Second, the Fed, "as first responder, must strongly resist the temptation to become the rescuer of last resort." Third, "governments may attempt to influence central banks to keep monetary policy looser for longer, to finance debt and stimulate economic activity." However, "the only reputation central bankers should seek, if any, is in the history books."
The fourth point is particularly crucial. Warsh emphasized: "It took central banks decades to bring inflation down to levels consistent with price stability. We should not risk these hard-won gains." This almost dogmatic anti-inflation stance seemed particularly stringent given the economic context of the time.
On the surface, the intellectual Warsh of today seems identical to the man of 2010. In a speech to the International Monetary Fund in April 2025, he not only emphasized the issue of the Fed's "mission creep" but also criticized its "failure to fulfill an important part of its statutory mandate—price stability."
Warsh's criticism was quite sharp. He pointed out that the Fed "facilitated an explosion in federal spending," and that "the Fed's excessive role and underperformance undermine the important and valuable case for monetary policy independence." His most pointed criticism was: "Since 2008, the Fed has been the most important buyer of US Treasuries."
He further elaborated: "Fiscal dominance—where the national debt constrains monetary policymakers—has long been considered by economists a possible endgame. My view is that monetary dominance—where the central bank becomes the ultimate arbiter of fiscal policy—is the clearer and more present danger." For Warsh, loose monetary policy is a path to ruin.
This leads to a perplexing question: Trump himself is the "embodiment of fiscal dominance," consistently lambasting current Chair Powell as a "jerk" for not cutting rates faster. So why would he appoint someone who appears to be a staunch anti-inflation hawk as Fed Chair? Beyond Warsh's "handsome appearance," there must be deeper reasons.
Wolf analyzes several possibilities. First, Trump might appreciate Warsh's hostility towards the Fed's "woke" overreach. Second, he may value Warsh's inclination towards financial deregulation. Furthermore, Warsh is a relatively orthodox choice, and his appointment could soothe nervous markets (which has indeed been the case so far).
But the key lies in this: Warsh "happens" to conclude that, due to technology-driven productivity growth, inflation is no longer a threat. This judgment might be correct—as Warsh himself noted, former Fed Chair Greenspan made a similar bet on the internet's impact in the 1990s. But for someone who worried about inflation during the deep recession of 2010, this is a bold shift. Wolf comments: "If he gets his way, he will replace the Fed's 'data dependence' with a hunch. Given the huge US fiscal deficits and debt, and rapid economic growth, this would be a huge gamble."
Wolf frankly admits that he actually agrees with some of Warsh's criticisms of the Fed, particularly regarding its deviation from core functions. He also concurs that post-pandemic inflation was partly the Fed's fault: along with other central banks, it failed to even consider that the 2020 surge in money supply might lead to a jump in the price level. Wolf also agrees that the backward-looking monetary policy framework introduced in 2020 was "conceptually and practically wrong (not to mention grievously mistimed)."
The Fed as an institution also offers some reassurance. As Wolf states, the Fed is far more than just its chair. Leadership is important, but Warsh cannot simply ride roughshod over other FOMC members or even staff, at least not in the short term.
However, concerns remain, focused on two areas. The first worry is that Warsh might be overly willing to defend whatever Trump wants, even if it means fully embracing fiscal dominance. More disturbingly, he seems intent on justifying this through a maneuver: actively shrinking the Fed's balance sheet while offsetting lower short-term rates with higher long-term rates.
Meanwhile, the US Treasury is likely to shift further towards short-term financing. This would lead to a steeper upward-sloping US yield curve, potentially resulting in increased demand for short-term dollar funding and decreased demand for long-term funding. Wolf warns that, crucially, "given declining bank reserves and financial deregulation, the financial sector's balance sheets would become more fragile."
The incentive to hold dollars might also decline, as short-term rates fall while inflation concerns rise. Wolf's conclusion is sobering: "The outcome could be another financial crisis." This is not alarmist. History shows that financial crises often stem from policy contradictions: attempting to maintain a facade of monetary discipline alongside fiscal expansion and deregulation, ultimately allowing systemic risks to accumulate in the shadows until a trigger ignites the entire chain.
Finally, Wolf offers a cautious but clear evaluation: "Yes, Warsh is better than many other candidates on the list. But he is a puzzling, and perhaps self-puzzled, figure." This assessment hits the mark—a central banker with an unpredictable stance can be more dangerous than one who is steadfast but wrong, because markets and economic agents cannot form stable expectations.
Wolf emphasizes: "The US and the world need a Fed Chair who can say no to Trump." He praises current Chair Powell for "having proven himself to be such a person." The article ends with an open question: "Will Warsh be that person?"
The answer to this question might only become clear during the next economic or financial turmoil. But by then, the cost may already have been paid. As the title suggests, whether Warsh triggers the next financial crisis depends on whether he chooses to be a principled central banker or a self-justifying apologist for political service. Current signs are not optimistic. History teaches us that when monetary policy independence is eroded, and short-term political calculations override long-term economic stability, financial system fragility increases dramatically. In this moment of uncertainty, we should perhaps remember Warsh's own words from 2010: the only reputation central bankers should seek is "in the history books"—the question is, for what will he be remembered?
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