Economist Peter St. Onge said newly appointed Federal Reserve Chairman Kevin Warsh has begun implementing significant operational changes at the Federal Reserve but argued the reforms do not go far enough to address what he believes are the central bank’s underlying problems.
During a recent commentary, St. Onge discussed Warsh’s first Federal Open Market Committee meeting as chairman, outlining several changes Warsh announced while questioning whether reforming the Federal Reserve is sufficient.
“It’s regime change at the Fed as Kevin Warsh carts off the Jerome Powell legacy to the dumpster. Is it enough to save the Fed, or is it time to dumpster the entire creature from Jekyll Island?” St. Onge said.
He said Warsh’s inaugural FOMC meeting largely met market expectations by leaving interest rates unchanged.
“Last week, freshly minted Fed Chair Kevin Warsh held his first big FOMC meeting, launching multiple Saviles that changes coming to the Federal Reserve on interest rates. It was pretty much what everybody expected, holding rates steady at basically neutral. Fed members’ rate expectations crawled up, which is not surprising given inflation took off on oil prices. But the Fed’s not panicking into hikes, which is good,” St. Onge said.
According to St. Onge, the most significant developments involved operational reforms rather than interest rate policy.
“But the big news was Warsh announcing five changes to how the Fed operates,” he said.
St. Onge cited economist E.J. Antoni’s assessment of Warsh’s approach.
“As my based colleague E.J. Antoni puts it, Warsh wants to dismantle the Fed bureaucracy to reorient it to the job it is supposed to do: fight inflation,” St. Onge said.
He explained that Warsh’s first change involved simplifying the Federal Reserve’s public communications.
“So first, Warsh slashed the so-called policy statement the Fed puts out to manipulate markets every meeting, replaced with a repeated promise of price stability,” St. Onge said.
He also praised Warsh’s effort to improve the quality of inflation data used by the Federal Reserve.
“Warsh was to improve the data the Fed uses, which is long overdue since the Fed has step by step painted itself into inflation data nobody believes,” he said.
St. Onge referenced polling that he said illustrates declining public confidence.
“A YouGov poll last year found over half Americans with an opinion do not trust government inflation numbers,” he said.
According to St. Onge, Warsh also intends to narrow the Federal Reserve’s focus after what he described as mission creep under former Chairman Jerome Powell.
“Morse wants to slash the mission creep that took the Fed from inflation fighter to economic manipulator to under Jerome Powell, climate change and DEI, fiddling with systemic racism while inflation burned at double digits,” St. Onge said.
He also discussed Warsh’s review of the Federal Reserve’s balance sheet, which currently totals approximately $7 trillion.
“Finally, Warschowl reviewed the $7 trillion Fed balance sheet, which is the accumulated assets, mostly federal debt, the Fed has bought with freshly printed dollars since the 2008 crisis, especially since COVID,” St. Onge said.
He argued that the expansion of the balance sheet contributed significantly to inflation.
“That’s where it basically types numbers into Excel sheets in the basement, announces they are dollars, and buys everything in sight, which prints new money. Now, this printing was the main reason for Biden inflation,” St. Onge said.
He added that Warsh has previously supported reducing those holdings.
“And Warsaw’s argued for years to pawn it, cancel the dollars, which lowers inflation, and use that to let rates come down to boost Main Street growth. In other words, take from Wall Street, give to Main Street,” St. Onge said.
While acknowledging that financial markets could react negatively to rapid balance-sheet reductions, St. Onge described Warsh’s proposals as respectable.
“So this is all respectable stuff,” he said.
However, he questioned whether reforming the Federal Reserve is preferable to dramatically reducing its role.
“But the larger issue is why fix the Fed when you can get rid of it? Not as a legal entity, Congress would have to do that, but as an economic manipulator,” St. Onge said.
He argued that the Federal Reserve itself is responsible for both inflation and recessions.
“After all, the Fed is the cause of both inflation recession, manipulating rates down until prices take off, then fighting the prices with hikes till you get a recession. Presto, boom, bust,” he said.
According to St. Onge, several legitimate banking functions already exist elsewhere within the federal government.
“The few legitimate things the Fed does, like payment and banking oversight, are already done by Treasury ROCC. The only thing a Fed adds is a counterfeiting cartel and bank bailouts,” he said.
St. Onge outlined what he believes would constitute meaningful reform.
“Concretely, this means letting markets set rates, no forward guidance, no policy statements, no anything, swearing off the money printing, no QE, no 7 trillion balance sheets, and letting banks know if they overland there is no bailout coming, they’ll go bust and get acquired at auction like any other business. That would be true regime change,” he said.
He concluded by saying he expects incremental improvements under Warsh rather than sweeping institutional changes.
“So, as the next brought to you by the Bitcoin way, sadly, Wash is not a revolutionary. His regime change is closer to rearranging the silverware. So, expect some improvements on the edges, maybe less climate talk, maybe even some better inflation data, and hopefully a Fed chair restrained enough that his boom busts are not as bad as the other 16 Fed chairs,” St. Onge said.
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