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Would Kevin Warsh Give The Fed A Makeover?

Posted by Dirk Watters on

Next February, President Trump’s will decide who will lead the Federal Reserve for the next four-year term….

It will be one of the biggest decisions of his presidency…

And Kevin Warsh is at the top of the list.

That may be a very good thing…

Or it may not.

Warsh, a 47-year old Harvard-trained lawyer, investment banker and former Fed governor is a Trump insider and is married to Este-Lauder heiress Jane Lauder.

He’s also a fierce critic of current Fed Chair, Janet Yellen…

And was highly critical of former Fed chair Ben Bernanke’s quantitative easing policy.

Disrupting the “new normal?”

For one thing, the economy is “used to the “new normal” of historically low interest rates from the Fed and slow economic growth.

That’s been the reality since 2009…

And for many in business, this factor is pretty much baked into the economic cake.

And then Donald Trump became president.

It can be said that Trump has already upset the status quo…

Growth has returned to the US economy, with the first 3% growth quarter since the first quarter of 2015, and regulations cut by almost one-third.

But with a change in policy in mind, Warsh may further disrupt the “new normal” and bring unpredictability into the Fed.

Of course, simply naming Warsh to chair the Fed may have a similar effect…

The bond market dropped sharply when Warsh was just mentioned as a candidate for the job...

What happens if he actually gets the job?

Rolling back 50 years of Fed predictability

It’s true that many conservatives and liberals are against Warsh’s candidacy for precisely that reason.

They know that he was against Bernanke’s low interest rate and high Fed balance sheet scheme…

And openly criticized it in the Wall Street Journal in 2010.

He was mostly right, though…

Quantitative easing did NOT help the real economy grow.

But it did help calm the worst fears and stabilize the economy – even if the cost was huge debt, high unemployment and low growth.

Still, Warsh would bring a new kind of energy to the Fed, and in more ways than one…

Like Donald Trump’s rise to the White House…

 But would that help or harm the economy and the dollar?

Usually, markets don’t like uncertainty…

And many think Warsh may would raise interest rates higher and faster than advisable…

And rapidly move to shed too much of the Fed’s $4.5 trillion in assets too fast.

If done too quickly, either policy could stop the economic recovery in its tracks…

And lead to a recession.

On the other hand, if a downturn occurred, would Warsh move fast enough to stop it?

Does Warsh have the RIGHT experience?

Even with all his credentials, Warsh may not have the right experience…

As one who is against quantitative easing, Warsh would have to be very skilled at unwinding the Fed’s assets to avoid too much market disruption.

He may not have the patience to do so…

Leading to distortions in markets…

And negative investor sentiment.

No one wants that – neither republicans nor democrats.

Hating QE when you’re standing on the outside looking in, is easy…

When it’s your hand on the tiller, how patient can he be in a policy that he never supported?

Indeed, Warsh believes that "additional monetary policy measures are poor substitutes for more powerful pro-growth policies."

That is, of course, true…

But his relative youth is also a concern…

Not only was he the youngest Fed governor at 35, but at 47, he would be the youngest Fed chair ever.

What’s more, Warsh would be the first Fed Chairman to not have a PhD in economics since 1979…

Does Warsh have the wisdom that the job requires?

Will Warsh be guided - or deceived - in making policy?

The BIG concern in some quarters is that Warsh can be guided into decisions that may help Wall Street or some other narrow part of the economy...

But hurt on the macro level.

Or, he may apply too much of the right policy to fast...

All based on sound economic theory and practice, certainly...

But like so many things in life...

The poison is, as they say, in the dose.

This may be where his lack of formal economic training may play a key role in his success or failure...

As well as the country's.

As you'd expect, economist Paul Krugman isn't a fan...

Seems that Warsh has been "wrong on everything"...

But Krugman has little to brag about - he's been wrong as much or more than anyone else who call themselves an economist.

What or who does Kevin Warsh represent?

But certainly, with his background and connections, several groups would demand his attention...

Including Trump, give his personal ties to the president.

And the simple fact is that many economic policies help one group and hurt another...

As it is, this is a very dicey time for the Fed, as it seeks to unwind its QE policy...

Just as it is for the US, as Trump tries to grow the economy via new trade deals, deregulation and tax relief.

That's why the next Fed Chair will have the greatest impact on the economy - for good or ill - since Bernanke...

And would have a direct impact on Trump's reelection in 2020.

Yep, there's a lot riding on Trump's Fed choice...

Is Warsh up to the task?


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