A Return to Monetarism? The Nomination of Kevin Warsh.
The nomination of Kevin Warsh as Chair of the Federal Reserve marks one of the most consequential points in US monetary governance in decades. Not because Warsh is a partisan puppet, which he is not, but because his monetary philosophy represents a direct contrast to the post-2008 activist stance that has dominated U.S. central banking and markets since the Great Recession.
Warsh is not an insider that has been cultivated within the culture of the Federal Reserve; he is an outsider who has operated at the highest positions effectively and with effectiveness and depth of knowledge. As a Fed governor during the 2008 financial collapse, he watched as emergency tools became the permanent activist instruments and large-scale action became the institutional habit of the Federal Reserve. That experience has caused him to speak out against the current dynamics of the board, favoring a rules-based approach to monetary policy rather than broad discretionary authority exercised by officials.
Viewing his experience at the Federal Reserve and in the monetary world allows us to see how his intellectual studies affected his way of thought. Warsh has aligned himself with positions similar to Milton Friedman’s monetarist theories, where price stability and rules-based credibility are pre-requisites for growth. He is skeptical of the idea that central banks can fine-tune outcomes without distorting the economy. He has repeatedly warned that prolonged monetary activism does not support the economy but reshapes it rewarding speculation and leverage over productivity and technological improvement.
This positions him at odds with the philosophy that defined the post-2008 Fed, QE, ZIRP, and forward guidance were initially framed as measures of last resort. Over time, they have become default policy as markets have priced in intervention, inflation has become the norm, and risk has been masked. Warsh’s critique is not that these tools were never needed, but that they should not have continued and the longer they are used, the more independence erodes as budget deficits are indirectly financed by monetary policy.
President Trump has been openly critical of the Federal Reserve because of political reasons. While Warsh’s nomination represents Trump’s perceived best interest, Warsh represents a different governing instinct. He is likely to position himself as a Chair who remains independent while fostering a disciplined working relationship with the Treasury to promote both practical fiscal and monetary policy. Economically, this signals a shift away from asset price manipulation toward genuine price stability, and a separation between expansion and backstopping. By reasserting these limits on the wide-scale powers the Fed can use, expect to see transparent, rules-based tools under tighter financial conditions. Which may mean, more stable prices, even with greater short-term volatility, and fewer illusions of costless stimulus.
For the institution, the implications toward independence are even bigger. Under Warsh’s leadership the modern idea of Federal Reserve independence will be challenged, as he will choose to stray away from the fear of criticism, toward disciplined independence. Where taking the necessary steps even when unpopular may become the norm to maintain the Fed’s narrow mandate. This matters especially during a time of political visibility, distributive impact, and a larger than ever balance sheet affecting the economy.
Critics will argue that Warsh’s discipline risks undercutting employment or slowing stimulus, while supporters will say that growth on distortion is not durable. But rather, that this nomination is the beginning of the end to post-2008 conventional monetary policy. While Kevin Warsh will not dismantle the establishment overnight, his nomination will begin to unwind large scale tools as normal policy. Whether markets welcome this reform or resist will reveal how dependent the US economy has become on an activist Federal Reserve.