New Fed Chair Kevin Warsh Issued a Prophetic Warning 16 Years Ago. Now It's Coming Back to Haunt Him -- and Perhaps Investors, Too.
Written by Keith Speights for The Motley Fool -> Warsh's 2010 speech warned about threats to the Fed's political independence. Investors shouldn't panic about what the Fed may or may not do, but they can take steps to be prepared. In March 2010, a 39-year-old Federal Reserve G
Warsh's 2010 speech warned about threats to the Fed's political independence.
Investors shouldn't panic about what the Fed may or may not do, but they can take steps to be prepared.
In March 2010, a 39-year-old Federal Reserve Governor stood at a podium in New York City. He delivered a speech titled "An Ode to Independence" before a meeting of the Shadow Open Market Committee, a group of economists that closely monitors policy decisions made by the Federal Reserve and central banks of other nations.
That young man was Kevin Warsh, who became Federal Reserve Chair last month. In his speech 16 years ago, Warsh issued a prophetic warning. And it's a warning that could be coming back to haunt him -- and perhaps investors, too.
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Warsh's 2010 speech began with an observation rather than an outright warning. He stated, "Increases in government expenditures around the world-- ostensibly instituted as a bulwark against further economic weakness--are raising fiscal deficits significantly." Warsh added, "Unsustainable, projected fiscal debt loads--including large and growing implicit guarantees bestowed upon large financial firms by governments--are raising concerns in sovereign debt markets."
His focus then shifted to the Federal Reserve. Warsh noted, "The Fed's greatest asset is its institutional credibility." He elaborated, "This credibility is essential. It increases the heft of our communications. It gives weight to our economic assessments. It amplifies the effect of announced changes in the short-term policy rate on longer-term rates. It is, in some sense, the real money multiplier in the conduct of policy."
But Warsh warned that the Federal Reserve's independence can't be taken for granted. He argued that it requires "fierce independence from the whims of Washington and the wants of Wall Street, and from a pernicious short-termism that can undermine the proper conduct of policy."
