9-29-17 4:44 PM EDT | Email Article
By David Harrison 

The revelation that President Donald Trump met with former Federal Reserve governor Kevin Warsh has increased speculation that he could be tapped to replace Janet Yellen when her term as board chairwoman expires in February. Mr. Warsh, a former Morgan Stanley executive, served on the Fed board from 2006 to 2011. He also sat on a business council advising Mr. Trump before it disbanded in August. In essays and public remarks, Mr. Warsh has expressed views on monetary and economic policy that shed light on how he might run a central bank if asked to do so. Below is a sampling of his views:

On Quantitative Easing

Mr. Warsh has expressed deep reservations about the Fed's asset-purchase programs, known as quantitative easing, or QE. In his view, the Fed's purchase of Treasury securities didn't give firms the intended incentive to make economy-boosting capital investments. Rather, he has argued, QE only pushed them to move money into financial assets or to buy back shares, boosting risk-taking in financial markets.

"If I were in your chair, I would not be leading the [Fed] in this direction," he told then Chairman Ben Bernanke during the Fed's November 2010 meeting as the central bank was deliberating launching the second round of asset purchases. Notably, though, Mr. Warsh voted with Mr. Bernanke and the majority to embark on the so-called QE2.

Fed officials have said they would consider new rounds of asset purchases to counter a future economic downturn. If Mr. Warsh becomes chairman, such a move could be less likely.

On Inflation and Monetary Policy

In a Wall Street Journal op-ed earlier this year, Mr. Warsh suggested lowering the Fed's inflation target to a band between 1% and 2%, down from the central bank's existing 2% target. Under that objective, the current 1.4% inflation rate would fall squarely within target, which could lead officials to higher interest rates.

At the same time, he called for a more hands-off monetary policy that would take action on interest rates "only when deviations from [Fed] employment and inflation objectives are readily observable and significant."

Mr. Warsh has repeatedly criticized what he sees as the Fed's heavy reliance on incremental changes in employment and inflation data as part of its "data dependent" strategy. "The Fed should stop indulging in a policy of trying to fine-tune the economy," he wrote in the op-ed.

On 3% Growth

Mr. Warsh has endorsed Mr. Trump's goal of raising annual economic growth to at least 3%. Other Fed officials, including Ms. Yellen, have said low productivity growth and an aging population will make sustained 3% growth rates "quite challenging" to achieve.

To Mr. Warsh, faster growth is possible through tax cuts, fewer regulations on businesses and lower government spending. In an essay co-written with fellow Stanford economists John Cogan and John Taylor along with Columbia University's Glenn Hubbard, Mr. Warsh argued that those economic policy changes could lead firms to make more capital investments and boost worker productivity.

"Could implementation of such a comprehensive economic plan raise the economic growth rate to 3 percent? We believe it can," the authors wrote. Both Messrs. Hubbard and Taylor also have been talked about as possible nominees for Fed chairman.

On Dealing With Congress

Mr. Warsh has said the Fed should be more humble in its dealings with Congress and the White House. Despite its independence on monetary policy matters, the central bank remains "subject to the people's will," he said in June. Congress created the current Fed and Congress can just as easily do away with it, he warned. "The idea that we [the Fed] are a permanent fixture in the economy is mistaken," Mr. Warsh said. "The reason we need to reform ourselves is because we believe in an independent central bank subject to the oversight of Congress and the selection of the president."

On Dodd-Frank

Mr. Warsh wrote last year that the 2010 Dodd-Frank law aiming to curb financial excesses had made the Fed too powerful in its dealings with the financial sector. Central bankers now "micromanage" big banks and hold too much sway in determining their profits. Banks have become "joint-venture partners with the Fed, serving as quasi-public utilities, " he wrote, a position that aligns with the views of Mr. Trump and other Republicans.

"As the dispenser of fault and favor, the Fed is contributing to the public perception of an unfair, inequitable economic system," he wrote.

Write to David Harrison at david.harrison@wsj.com

 

(END) Dow Jones Newswires

September 29, 2017 16:44 ET (20:44 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
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