A wavering Warsh comes to the Fed

Subscribe to enjoy similar stories. About the author: Constance Hunter is the chief economist at the Economist Intelligence Unit. She was formerly chief economist of KPMG. Kevin Warsh has been able to thread a very fine needle.

On the morning of his Federal Reserve chair nomination Friday, there was still little consensus on whether he tilts dovish or hawkish. Or is he a hawk in a dove’s clothing? Cynics have whispered that Warsh, a former Fed governor, is hawkish when a Democrat occupies the White House and dovish when a Republican does. There is a nugget of truth in that; Warsh has wavered over the years.

From his time at the Fed from 2006-2011 and in many of his public comments since, he tilted hawkish. But in the run-up to his nomination, he argued a more dovish stance would achieve the Fed’s policy objectives. Recently, Warsh has spun his long-argued view in favor of a smaller balance sheet into an argument that shrinking the balance sheet via quantitative tightening would allow the Fed to lower interest rates without threatening to elevate inflation.

(This policy would steepen the yield curve. Higher long-term rates would do little to lower mortgage rates, a key objective of the Trump administration.) In attempting to thread the needle between an independent Fed that is wary of funding the Treasury via large-scale asset purchases and a more populist dovish tilt that appeals to the president, Warsh may have given up some credibility among economists of the guild. There are several ideas he has adhered to throughout his career.