Warsh criticizes the Fed’s shifting definition of inflation and questions the last half-point cut as unwarranted. 
On CNBC Squawk Box, former Fed governor from 2006 to 2011 blasts the Fed in multiple ways.
Squawk Box Rebecca Quick: What do you mean when you say this [the 50 basis point rate cut] goes against what the Fed has been saying up to this point?
Kevin Warsh: They’ve had different theories Becky about the causes of inflation, the measures they use. People in the financial markets and the media have tried to follow those.
Warsh on Changing Preferred Measure of Inflation
- A few years ago they said they were for flexible average inflation targeting. So when inflation was at 1.7 percent they said they would get it a little higher, balanced around 2. They seem to have gotten rid of that idea without replacing it.
- Then they said for a long time what really matters is core PCE [the Personal Consumption Expenditures price index]. That’s what we should focus on. But it’s now running at around 2.7 percent, nowhere near their 2 percent range.
- About a year ago they said the best measure of inflation is a new category. They said it was core services excluding housing. Well, that’s in the fours [4 percent range].
- Previously, Janet Yellen said what really matters is wages. And we need wages to run at 3 percent which is consistent with inflation running around 2 percent. Well wages are running around 4.
- They don’t seem to have a serious theory of inflation that’s theoretical and empirical. It’s not obvious they acknowledge what their role is in prices. Instead it has something to do with wars and pandemics. [Actually, it’s obvious they refuse to admit their role in the process].
- Where fiscal policy is irresponsible, the central bank needs to be very clear about its reaction function, be clear about its goals, and not look like it’s lurching because that’s what put us in the mess we have.
Rebecca Quick tried to nail down Warsh on improvements in inflation, a dual mandate, and changing data.
Warsh replied: It’s a fair point. What you are really saying is they claim they are data dependent. And when times change they should change. Of course that’s right. The data, since the early part of summer has gotten better. The economy has gotten stronger. [Mish comment – assuming you believe the data, which supposedly the Fed does, or they should say so]. The broad sense [not mine] is the economy is in better shape. If that’s all true, maybe they are not data dependent.
Warsh on politics: I do not want to be the person accusing them of politics. [But he’s doing that anyway with much more below to come]. That’s not the central bank I know. But when you don’t have a theory and follow it, it’s easy to get that accusation, and it’s harder for me to defend them.
Should the Fed Influence Politicians?
Squawk Box Co-Host Joe Kernen: Should the Fed Influence Politicians? With Becky quick adding “and how complicated is that?”
Warsh: When they kept interest rates near zero, for a decade, and did Quantitative Easing where the central bank was buying the bonds of the Treasury Department in a crisis, and decided to make that more or less a permanent feature, it is the Fed that wandered into politics on a permanent basis. In a period of free money, it was a clear sign to Congress, you can spend all the money you want. So they did. …. Over the course of the last few years, Congress with relatively full employment, added 5 trillion dollars in deficits. This level of debt is dangerous to the economy.
Fed Uncertainty Principle
My favorite post ever is the Fed Uncertainty Principle. I wrote that on April 3, 2008, before the collapse of Lehman.
Corollary #1, #2, and #3 are the spotlights today, based on the statements of Warsh.
Here are the key snips.
Does the Fed Follows the Market?
Most think the Fed follows market expectations.
However, this creates what would appear at first glance to be a major paradox: If the Fed is simply following market expectations, can the Fed be to blame for the consequences? More pointedly, why isn’t the market to blame if the Fed is simply following market expectations?
This is a very interesting theoretical question. While it’s true the Fed typically only does what is expected, those expectations become distorted over time by observations of Fed actions.
Fed Uncertainty Principle: The fed, by its very existence, has completely distorted the market via self-reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed’s actions. There would not be a Fed in a free market, and by implication, there would not be observer/participant feedback loops either.
Corollary Number One: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn’t know (much more than it wants to admit), particularly in times of economic stress.
Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.
Corollary Number Three: Don’t expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.
Corollary Number Four: The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it’s easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.
The Fed has blown two major asset bubbles, never saw recession, and wanted to make up for lack of prior inflation when it does not even know what inflation in.
Now they give forward guidance on their thinking and all the banks front run it, which partially explains the collapse of Silicon Valley Bank.
Fed “Playing With Fire” Take Two, Who Starts the Business Cycle?
The discussion by Warsh is also a perfect follow-up to a Mises video and and my comments to the video Fed “Playing With Fire” Take Two, Who Starts the Business Cycle?
The Fed does not control fiscal policy but the Fed certainly enables fiscal policy by monetizing the debt. Massive QE operations create economic bubbles.
The Fed was not responsible for the unprecedented fiscal stimulus in Covid, but it was responsible to understand the impact.
The Fed’s monetary response on top of a massive and unwarranted fiscal response was one of the worst errors in Fed history.
Like Mises, I would like to End the Fed. The question is how.
Please click on the above link for a discussion of how and the risks involved.
Finally, a forthright disclosure of the Fed’s socialist monetary policies by a former Fed Governor. Although, Warsh was involved in the bailout of the wealthy brokerage industry during the mortgage crisis. Walsh states the Fed made the mortgage crisis QE ZIRP “more or less permanent” for a decade. A decade that kept the Obama administration afloat, as the Fed “wandered” into progressive politics. Warsh observed the “free money was a clear sign to Congress to spend, and in the last few years added $5T to the deficit when there was relatively full employment”. Which simply is counter to the Fed’s dual mandate.
“They don’t seem to have a serious theory of inflation that’s theoretical and empirical.”
Duh!
It is definitionally impossible to have anything even resembling a theoretically (nor empirically…) serious “theory” of inflation, as long as one is limiting the “theory” to consider prices of ANY arbitrary “goods basket.” Prices move for all manners of reasons: Wars, inflation, droughts, pandemics, ocean boiling comet strikes etc.
A “theory of inflation” doesn’t become more, nor less, serious by, in the utterly arbitrary goods basket including only buttersticks, vs by including buttersticks and also strip club tips. Any “goods basket” is ARBITRARY. There are no exception. That whole project, will never be “serious.” Since it can not be “serious.” It’s arbitrary. Hence definitionally non-serious for all and ever.
Which is why any serious study of economics, measure inflation the only possible non-arbitrary way: As a measure of how much the stock of money is INFLATED. That IS INFLATION. Anything less can never amount to anything other than entirely arbitrary, hence utterly unserious, singularly mindless babble; by and for nothing but illiterate idiots who simply lack the logical acumen to understand anything of any seriusness at all.
What a crock!
The “goods basket” is NOT arbitrary. It is selected by the FED according to surveys of what regular Americans actually buy (and the changing prices of those goods). So you and I and every other American (or at least the survey respondents) determine what’s in the goods basket by our individual choices – so again, not random.
But of course, as the Fed (and Mish) state, that goods basket – and their changing prices – is not the same for everyone so “mileage varies”. I’m not a senior citizen so I don’t know nor currently care what cancer medication and heart healthcare costs because I don’t pay it. My children are also past the age of babies, so I don’t know nor currently care what diapers and childcare costs. But it would be idiotic for me to claim the Fed should not measure the changing costs of those items because the “average” American household (based upon surveys of actual purchases) does pay for them (statistically) and so cares. So we should want the Fed to measure that “goods basket” even if all of us don’t currently pay those particular changing prices.
Measuring inflation by “stock of money”; now, that’s arbitrary! Which stock of money? Paper dollar bills printed by the Treasury? Bond purchases by the Fed? Amounts of deposits regular citizens hold in bank checking accounts? Money citizens, foreigners, commercial banks and the US Social Security Trust Fund hold in US T-bonds? Those all change in different directions and in different velocities for a host of reasons – including personal choice like what investments I choose to hold at any given time and in what form. Choosing one of those measurements and comparing two random points in time to measure “inflation” is the epitome of arbitrary.
“It is selected by the FED according to surveys of what regular Americans actually buy..”
You mean, such as houses, stocks, bonds, retirement “products”, “insurance,” mandates, ambulance chaser fees, bailouts and shares of ever more expensive “Ironclad guarantees of Support for Ukraine and Israel?” Those are, after all, what the lion’s share of Americans earnings are spent on. Or were those just ARBITRARILY not included in the “surveys?” (as if “surveys” aren’t, in and of themselves, arbitrary to begin with…..)
“Measuring inflation by “stock of money”; now, that’s arbitrary!”
Yes it is. Currently. At least within some constraints. But only SPECIFICALLY BECAUSE money is now ARBITRARILY printed up. In order to ARBITRARILY “target” the ARBITRARY price of something ARBITRARILY counted among all the possible things people can and do spend money on, instead of ARBITRARILY not being counted.
OTOH: There is nothing arbitrary about weighing/counting ounces of Gold in Ft Knox. You find another deposit, you inflate correspondingly. If you don’t, you don’t. Ever rising “Prices” of ARBITRARY “Ironclad guarantees” kept out of it entirely.
“measure inflation the only possible non-arbitrary way: As a measure of how much the stock of money is INFLATED. That IS INFLATION.”
Precisely. Inflation is not rising prices. It is an increase in the supply of money available to act as a medium of exchange.
When isn’t it political? In 2000, Greenspan raised rates until May, then stopped, as beyond that, it was seen as too close to the election. With the contested election, Greenspan waited until January 2001 and made an emergency 1/2 point rate cut prior to the scheduled meeting. The 2001 recession was mild, lasting only 6 months, indicating no need for an emergency rate cut, just a few weeks before the regular meeting.
You could have said the same thing 30 years ago. The Chairman’s appointments seem to “follow the elections”.
By continuing on its current course, the Fed will eventually end itself by rendering the currency that they issue worthless.
Well, at least she asked him about the dual mandate.
Most recent GDPNow forecast (today) came out at 3.3% REAL growth (AFTER inflation) for final estimate of 3rd quarter 2024. Way to go, America, in making goods and services, selling them, and keeping others employed!
The Fed has targeted the federal funds rate at 4% or over for the past two years (and over 5% for a year plus). Hopefully, that has started to slow some of this production and buying madness and GDP will come down to more sustainable levels – before new buying pops up the inflation rate again.
considering all ‘inflation’ really is govt theft by fiat
I worked hour $20 but now it only takes me 15 minutes to earn same
means $20 has become worth much LESS
theft of MY TIME
They are literally stealing the value of your labor and hence the time you spent laboring to earn the currency. Meaning they are stealing a portion of your life. Which in my book is murder-lite. This is why a lot of the Founding Fathers were so against a central bank.
I agree and that is how i think of inflation. You agree to trade time for money, and then the fed/gov change the value of that money later on.
It is also crazy to me how the populace are focused on how high prices are for Item A or B, as if the value of the tangible good has changed. It likely has not, but the value of the medium of exchange we are all using as a measure has decreased in value.
I also like your term “murder-lite”
Why Some Republicans Are Praising An Agency They Hatehttps://www.politico.com/news/magazine/2024/10/24/why-republicans-praising-consumer-financial-protection-bureau-00185178
Jasa deflated. 70% unemployment. 80% GDP plunge. Israeli co will shift production to Jasa. High tech co will hunt talented Palestinian zoomers with brains, especially educated females. MBS and Qatar will do the same. Within a few years Jasa will become a high tech center.
Wars are expensive. Banks and gov finance wars. In 1919/20 the Ausro-Hungarian empire collapsed. Their bonds became worthless. The bank that bet on them faded. In 1945 three empires lost. We took over. All empires collapsed the same way. The bad guys, that don’t belong there, proliferate at the expense of the good citizens, weaken it, become aggressive and exposing it to outside forces. China and Russia might win without firing a shot, but if they fight for the loot they will destroy themselves, betray themselves. Trump + Putin vs Xi is better than Xi + Putin vs Biden/Harris.
But, were not in a war? Ukraine is, Israel is, Russia is, Middle-east is, Harris and Biden are “Stealing Tax Dollars” from Americans, and handing Americans Citizens Money to some of those Countries war efforts. They Pay The U.S. Back EVERY $ though, Right??? We would only do so, with that agreement in place, Right??? Otherwise They Would ASK Permission from The Taxpayers BEFORE Taking There $$$ Right???
It is never “our Money” – – but the MIC’s money, courtesy of the “press.” The FED is in CAHOOTS with the bankers and the war machine. It is all a well-cooked Money Dance and then they have the CITIZENS tangled up with Abortion, and Homelessness, and the other piles of shit that they created.
Oh David, it’s always “Our Money” and just because they take it doesn’t make it theirs. It’s just stolen (because it wasn’t asked for and “Approved” to take by the Taxpayers!).
This is “Exactly Why” we must Vote!!!
Voting ain’t gonna do squat. Vote harder, cope harder, it won’t matter.
We are at the point where war is only one order away.
Let’s hope that Trump is in place before that order is made, and then it won’t be necessary!
It remains to be seen if Trump has both the vision and statesman qualities to enable a realignment with Russia, and survive numerous assassination attempts by America’s warmongers.
I think He does, but we need Him in office first, if we are to see any change for the good.
I guess this guy wants Trump to offer him a job. The only good point he makes is that the Fed’s reaction function needs to be transparent about how it changes in response to a regime change in the fiscal policy reaction function. The rest sounds like noise.
Mish finally you are openly letting this be the story it really should have been al along. Now each Fed governor’s speeches should be analyzed through the lens of their personal political beliefs and affiliations as well as economic rationals. That bogus 50 basis point cut was either out and out political interference or absolutely necessary because the banking system is about to have another massive problem, It certainly wasn’t done to help the employment market nor the economy and it clearly wasn’t done to help the fight against inflation so in effect it was a political Hail Mary stunt. If that is what the Fed is there for then we have to rethink their place simply because they are displaying behaviors which will result in a long term loss of faith in the institution.
Jerome Powell was selected as Fed chair by President Trump. So now he’s engaged in political interference against Trump? He must be another Republican switching sides?
LOL – these new conspiracy theories never get old
“He must be another Republican switching sides?”
if you haven’t noticed there have been a few of those lately.
Not all republicans are fascists, it turns out.
Used to be they kinda made sense in some way. Now it’s jus blubbering through angry tears. Stupid and mad have replaced intelligent and crazy,
It turns out that the Cheney’s are voting for a communist, along with some other prominent Republicans.
A well-conceived and written comment, Rick! SPOT ON!
Expanding your explanation… the Fed needs to reduce its bond holdings prior to a worsening recession if it is to have any hope of affecting the situation. The same is true of all banks. Ramming down yields will increase bond prices….
…and then there’s this:
Jerome Powell: “I think we now understand better how little we understand about inflation.” 6/29/2022
Mish, I agree with your corollaries. I would add two more.
A FED watcher that has forgotten more than I know has remarked that since its creation the FED has been responsible for every recession and depression since its founding. So, one has to ask what the hell good are they.
I would advocate to form a Bank of the United States founded on the ideas of Alexander Hamilton instead of the FED.
The TBTF banks need to be gutted and returned to serving the community at the local level and not to cross state borders.. Wall Street can return to the wealth management, mergers and acquisitions market making and consultative business models. They cannot be publicly held. They are a national security concern. They can return to what Goldman Sachs once was namely a partnership equity form that when doing investment banking the partners equity was on the line.
Yeah, and the Fed was responsible for all the recessions and depressions prior to its creation (which were A LOT) as well
LOL
Like Mises, I would like to End the Fed. The question is how.
Amen to that forever!
Red pilled Warsh. Fed as an old George Carlin skit about a sportscaster, Biff Barf. “I call em like I see em and if I don’t see em I make em up.”
Mortgage rates are back to where they were in July. 1/2% cut in short term rates does little, but it has shown the impotence of the Fed.
In a past period quite similar to that in which we find ourselves today there was William Blake.
Blake imagined a character into existence whom he called Urizen.
Will post here as a sample what Wikipedia describes.
“Urizen: In the mythology of William Blake, Urizen is the embodiment of conventional reason and Law. He is usually depicted as a bearded old man; he sometimes bears architects tools, to create and constrain the universe; or nets, with which he ensnares people in webs of law and conventional society.”
This is the Newtonian view of measuring the three dimensional world so as to bring it under control via defining it with in effect a measuring stick.
Blake is worth at the least a review or a full on study if a person has interest in understanding the level of control being imposed by institutions such as Fed upon civilization. Also consequences which resulted to Governmental structures by imposing such control.
Blakes times turned out to become one of the most revolutionary periods of all Human history.
Most Excellent Post Mish!
– Corollary Number One: The Fed has no idea where interest rates should be.
> Well they sure do appear to be able to match the “Political Need for Movement” along with the “Interest Rate Movements” So there’s that…
– Corollary Number Two: The Fed, or Government body most responsible for creating this mess, will attempt a big power grab, purportedly to fix whatever problems it creates.
> Well the Fed certainly did create one heck of a Mess! “Doubtfully Planned” OR perhaps, “Faulty Executed”. None the less, it’s obviously Not Fixable, by this Same Group of Individuals, and perhaps even the set-up itself?
– Corollary Number Three: Don’t expect the Fed to learn from past mistakes.
> Nobody should, but also don’t anticipate they will be around forever either. That remains to be seen.
– Corollary Number Four: The Fed simply does not care whether its actions are illegal or not.
> That is only because they have yet to be really pushed into doing their job more efficiently. For Ex. The President can “Fire” the Fed Chair. Hasn’t happened, but it could. Perhaps if 1 or 2 get “ Fired” for solid underperformance due to decision making and a weak understanding of Financial Principles, the rest will Perk Up a bit more, or they can be replaced too.
>> Don’t Settle for less than “Sound and Solid” Economic Decisions and “Principled Fundamentals” as those will steer things towards the right direction. If more, and even continued change is needed, then so be it. No Theory’s, just Principles!
Warsh is a linear economist. Nonlinear thinking by non economist experts : cut rates under the inflation rate. Impose tariffs to protect our national security factories. Cut gov spending. With those 3 ingredients the US gov will be able to cut debt from $36Tto $26T/$30T in 5Y, in nominal terms, or by 40%/50% in real terms. Before the next Hoover comes back raise rates to 7%/10%.
Trump is more qualified.
Example : 50 x F-15 for $18B. After Boeing mech settlement charge Israel $5B for inflation.
Sure, cutting rates (due to political President pressure) below inflation rates really helped Turkey rein in its inflation problem the last few years LOL
So, I assume this recent Japanese Yen carry trade was part of this $1T arbitrage?
If so, then the Fed is nothing more than a bunch of crooks. The fact that they’ve air dropped trillions of dollars into the banking system which ends up getting invested in all of these different types of interest rates that the Fed pays is another example of the crookedness. RRPs peaked at $2.5T in Dec 2022. Think of the hundreds of billions of dollars that the Fed has paid on RRPs over the last 10 year? It’s literally mind boggling.
By my understanding, a big part of this helicopter money is gifted to banks who lend it back to the Fed overnight and reap un-Godly amounts of free profits.
QE is nothing more than a massive dump of liquidity that let’s the banking system buy treasuries during the relatively good times when the Fed is not buying bonds. The Fed injects liquidity into the system so Congress can run deficits. That’s CRAZY!
The Fed is utterly corrupt & enablers creating massive asset bubbles that primarily benefit the uber rich.
And I love how Warsh dodges the question about whether or not the Fed should actively push back against Congress. It’s a great question, but we all know it’s not going to happen until the train is about to run off the rail which will be too late.
The Fed was founded to ensure the banking system has adequate liquidity to function smoothly. In order to do that properly, it must heavily regulate bank lending and investment to reduce the graft and corruption that is a natural outgrowth of humans with a lot of money at their disposal. Alan Greenspan’s personal ideology was that banks could naturally regulate themselves which, of course, lead to the crash in 2008. The federal government had 3 choices: let the banking system crash and let tens of millions become unemployed, take over the bad banks and recapitalize them, or let the Fed recapitalize the banks with complex financial programs. The first was a non-starter politically. Every politician would have lost their job and we might have gone hard left like the FDR days. The second would show the power of the federal government to make people’s lives better and more secure, again a throwback to FDR. The third was socialist also, but the complexity hides it, and lets people continue believing that the market is self-healing. Pick your poison. For capitalism, the third was the right choice.
All you have to do is drive the banks out of the savings business, then there would be no too big to fail banks. And that doesn’t reduce the size of the payment’s system. It just redistributes money to the SMAs where it originated.
People just don’t understand money and central banking. The source of interest bearing deposits is other bank deposits, directly or indirectly via the currency route or through the banks undivided profits accounts. Loans/investments = deposits.
See “Should Commercial Banks Accept Savings Deposits?” by Leland J. Pritchard, Edward E Edwards, and Lester V Chandler at the 1961 Conference on Savings and Residential Financing in Chicago, Illinois, and the article by Dean Carson “Bank Earnings and the Competition for Savings’ Deposits,” Journal of Political Economy LVII (December 1959) 580-88.
I.e., the economic engine has been run in reverse.
Debasing the currency is capital treason. The Fed can end by hanging, electrocution, lethal injection, or firing squad.
… and. when they had it at 2%, it wasn’t politics?
Always the victims…
J Powell said over and over their decision to cut .50 before the election was not political. Everyone and their monkey knew he was lying. The FED is political, no doubt about it. Gold is the only money left now. They will continue to devalue your dollar.
Pretty clear Powell was playing politics. It’s outrageous and he should be fired on day one.
Trump isn’t firing anybody. He’s headed for the memory care ward.
You’re thinking of Biden, actually…
That’s the lamest comeback I’ve seen today. You people really are stupid, and not afraid to show it.
He won’t let them study His Brain, for all the amazing reasons he is so much better than all other Politicians in “Modern Day America” but we already know “Why”
Because He CARES About America, AND It’s Citizens as RULE #1! It’s Really and Truly that Simple!!!