Larry Kudlow, the Reagan administration economist who also advised the presidential campaign of Republican Donald Trump on a tax reform plan, said the Federal Reserve would undergo positive reforms with Kevin Warsh as the central bank’s next president.
Warsh served as Fed governor from 2006 to 2011, during the financial crisis, and was an economic adviser to President George W. Bush from 2002 to 2006. He also was an economic adviser to 2016 Republican presidential candidate Jeb Bush, the front-runner for the nomination before Trump’s rise surprised the political establishment.
President Trump and Treasury Secretary Steven Mnuchin last week met with Warsh and Fed governor Jerome Powell to discuss their possible nomination to succeed Janet Yellen, the central bank’s current president whose term expires in February.
Warsh has criticized the Fed for being a close-minded group of bureaucrats whose institutional groupthink blinds them to the risks they help to create in markets and the economy. Some critics have blamed the central bank’s easy money policies for encouraging serial asset bubbles since Alan Greenspan led the institution in the late 1980s.
“The conduct of monetary policy in recent years has been deeply flawed,” Warsh wrote in an opinion piece published in The Wall Street Journal in August 2016, citing the weak economic growth of recent years. He called for “a rigorous review of recent policy choices and significant changes in the Fed’s tools, strategies, communications and governance.”
Kudlow repeated his support for Warsh, whom he recommended to the Trump administration.
“Warsh wants a different Fed. He’s a reformer. He wants them to change their models,” Kudlow said on CNBC. “He wants them to pay much closer attention to what he calls ‘non-labor variables’ because they don’t impact inflation. He would like to see including commodities and the dollar exchange rate as forward-looking inflation indicators.”
After leaving the Fed in 2011, Warsh became a visiting fellow at the Hoover Institution, a policy think tank affiliated with Stanford University.
“Warsh has laid out a very strategical notion, it’s not about low or high rates. He is saying fiscal policy is going to change. We’re going to have better tax policy and better regulatory policy,” Kudlow said. “And that will lead in his judgment to better economic growth and higher productivity, and to close the loop, that does not necessarily mean higher inflation and interest rates. In fact, it could be the reverse.”
Warsh isn’t necessarily pushing for higher rates, either, Kudlow said.
“Warsh is not a high-rate guy or a low-rate guy. People are saying he’s a hawk. That’s not true,” Kudlow said. “Warsh makes a different point. It’s a reformer’s point. He’s basically saying the Federal Reserve has a predilection, a penchant, down through the years to assume old-style Phillips curve – that significant economic growth and wage hikes cause inflation.”