Is The End Nigh? Former FOMC Member Warns "The Fed Is Vulnerable"

Tyler Durden's picture

Authored by former Fed member Kevin Warsh, originally posted op-ed via The Wall Street Journal,

The conduct of monetary policy in recent years has been deeply flawed. U.S. economic growth lags prior recoveries, falling short of forecasts and deteriorating in the most recent quarters. This week in Jackson Hole, Wyo., the Federal Reserve Bank of Kansas City hosts the world’s leading central bankers and academics to consider monetary reform. The task is timely and consequential, but the Fed needs a broader reform agenda.

Policy makers around the world neither predicted nor can adequately explain the reasons for current inflation readings below their targets. So it is puzzling that so many academics are pushing to raise the current 2% inflation target to a higher target of 3% or 4%. In the telling of the economics guild, the Fed’s leaders should descend from the Grand Tetons with supreme assurance that their latest monetary policy invention will remedy the economy’s ills.

The Fed’s leaders should not take the bait. Raising the inflation target is a bad idea being considered at the wrong time for the wrong reasons.

A new inflation target would undermine the Fed’s commitment to any policy framework. It would please the denizens of Wall Street who pine for still-looser Fed policy. And households would be understandably miffed to receive a new lecture on unconventional monetary policy—this one on the benefits of higher prices.

A change in inflation targets would also add to the growing list of excuses that rationalize the economic malaise: the persistent headwinds from the crisis of the prior decade, the high-sounding slogan of “secular stagnation,” and the convenient recent alibi of Brexit.

A numeric change in the inflation target isn’t real reform. It serves more as subterfuge to distract from monetary, regulatory and fiscal errors. A robust reform agenda requires more rigorous review of recent policy choices and significant changes in the Fed’s tools, strategies, communications and governance.

Two major obstacles must be overcome: groupthink within the academic economics guild, and the reluctance of central bankers to cede their new power.

First, the economics guild pushed ill-considered new dogmas into the mainstream of monetary policy. The Fed’s mantra of data-dependence causes erratic policy lurches in response to noisy data. Its medium-term policy objectives are at odds with its compulsion to keep asset prices elevated. Its inflation objectives are far more precise than the residual measurement error. Its output-gap economic models are troublingly unreliable.

The Fed seeks to fix interest rates and control foreign-exchange rates simultaneously—an impossible task with the free flow of capital. Its “forward guidance,” promising low interest rates well into the future, offers ambiguity in the name of clarity. It licenses a cacophony of communications in the name of transparency. And it expresses grave concern about income inequality while refusing to acknowledge that its policies unfairly increased asset inequality.

The Fed often treats financial markets as a beast to be tamed, a cub to be coddled, or a market to be manipulated. It appears in thrall to financial markets, and financial markets are in thrall to the Fed, but only one will get the last word. A simple, troubling fact: From the beginning of 2008 to the present, more than half of the increase in the value of the S&P 500 occurred on the day of Federal Open Market Committee decisions.

The groupthink gathers adherents even as its successes become harder to find. The guild tightens its grip when it should open its mind to new data sources, new analytics, new economic models, new communication strategies, and a new paradigm for policy.

The second obstacle to real reform is no less challenging. Real reform should reverse the trend that makes the Fed a general purpose agency of government. Many guild members believe that central bankers—nonpartisan, high-minded experts—are particularly well-suited to expand their policy remit. They fail to recognize that central bank power is permissible in a democracy only when its scope is limited, its track record strong, and its accountability assured.

The Fed is suffering from a marked downturn in public support. Citizens are rightly concerned about the concentration of economic power at the central bank. Long after the financial crisis, the Fed holds trillions of dollars of assets that would otherwise be in private hands. And it appears to make monetary policy with the purpose of managing financial asset prices, including bolstering the share prices of public companies.

With the enactment of the Dodd-Frank Act, the Fed claims the mantle of reform. It now micromanages big banks and effectively caps their rate of return. The biggest banks’ growth in market share corresponds to that of their principal regulator. They are joint-venture partners with the Fed, serving as quasi-public utilities. As the dispenser of fault and favor, the Fed is contributing to the public perception of an unfair, inequitable economic system. Real reform this is not.

Most gathered in Jackson Hole will judge that the Fed’s aggressive actions are necessary and wise. Even if that were true, the Fed finds itself in an increasingly untenable position. Congress will tag the Fed for its failures, and the public will assail the Fed for favoritism for its ostensible successes.

In the best of circumstances, the U.S. economy will accelerate to “escape velocity.” In that event the Fed might get the benefit of the public doubt.

If, as is more likely, the economy is closer to recession than resurgence, the Fed is poorly positioned to respond with force, efficacy and credibility. The Fed is vulnerable. Its recent centennial as our nation’s central bank should not be confused with its permanent acceptance in the American political system.

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Bill of Rights's picture

Dear Genie of the lamp last wish IMPLODE THE FED....


First, you must steal the All Seeing Eye. See _The Thief of Bagdad_ for reference.


good luck

LadiesLoveCoolJames's picture

They can invent money. How can they be vulnerable? It all falls when the fed says so. Not a second earlier.

white horse's picture

Exactly, they don't even have to print, just add some zeroes at the end.

Government needs you to pay taxes's picture

Take names.  When it blows up, remember which ones squawked for higher inflation.  They must be the first to feed the hungry gallows.

Life of Illusion's picture

Long after the financial crisis, the Fed holds trillions of dollars of assets that would otherwise be in private hands.


Ben said "hold assets until maturity" !

Another year of BS at the HOLE.

Better fishing at Henry's Lake west of Grand Tetons 

khakuda's picture

They already created too much inflation, with housing, education and healthcare now unaffordable having outpaced the growth in wages for decades.  I think their real problems happen when they get the even higher inflation they are looking for as the majority, which has almost no savings now and whose pensions are moving towards invsolvency, becomes completely impoverished.

They could also completely blow it, which seems to be what they are aiming for, and create a nice Weimar style currency depreciation.  In our lifetime, we haven't seen a reserve currency implode....yet.

Government needs you to pay taxes's picture

The inflationary forces created by the QE-monetists will indeed cause a reaction from the real economy.  Invest less, save more, take $$ out of the system, dump more into land/PM/discounted P&E.  

Hitlery_4_Dictator's picture

The FED is vulnerable! THERE IS A GOD!

Not My Real Name's picture

They can invent money. How can they be vulnerable?


Correction: They can invent currency ... not money. And they are vulnerable to a loss of confidence in that currency.

orez65's picture

How can the American People be so fu.king stupid!!

The Federal Reserve is a private company countefeiting TRILLIONS OF DOLLARS under the guise of "optimizing" the US economy.

They are fu.king robbing us !!!

WAKE THE HELL UP !!!!!!!!!!!!!!

E.F. Mutton's picture

Because Kardashians, Hot Pockets and Fantasy Football

Go Local Sports Team!

bada boom's picture

"American People"  Have you not learned anything from history?  It is just a part of mankind.  Perhaps the next species will be smarter, but not this one as a whole.

pundog's picture

Most people have no savings. Are in debt up to their eyeballs. The ONLY thing keeping them afloat is low interest rates.  Why would the average family in such a state want the Fed to raise rates?  I lived through 16% mortgage rates.   People will take to chasing bankers when  rates go up  NOT down.  My guess is that nobody's life will be better with massiive corrections. Enjoy the free money.  Ask yourself how will your life be better if your car payment doubles or your mortgage payments become unmanageable to refinance?  Everything in daily life will cost more.  Life can be MUCH worse than zero percent interest rate policy.

khakuda's picture

It is clear why Kevin left the Fed.  He didn't subscribe to the groupthink lunacy that free money, currency debasement, ever higher debt and inflation will make everything better.

Glad he continues to speak up from outside. The sooner Greenspan, Bernanke, Krugman, Summers, et al get revealed for the lunatics they are, the better.

Inflating the 90s stock bubble was bad enough,  To then purposefully inflate a real estate bubble to recover from it was beyond insane.  To then go all in Japan style which has shown nothing but failure to push assets to record highs again should require jail time for monetary malpractice.

LadiesLoveCoolJames's picture

He left the fed to add 2 or 3 zeroes to the end of his income. Don't give this dick hole even one ounce of sympathy or credit.

khakuda's picture

Nah, give him some credit.  I think he is mostly academic now.  Pay is probably better than government work, but he married Jane Lauder and certainly doesn't need the money.

LadiesLoveCoolJames's picture

Ok. Married old money gash. I guess that gives him some flexibility. Still an establishment dweeb.

moneybots's picture

"...our nation’s central bank should not be confused with its permanent acceptance in the American political system."


Permanent acceptance by whom? The bigoted elitists?


dimwitted economist's picture

gold and Silver still being Manipulated much LOWER...

who is doing that? the Fucking Fed!

chief's picture

reads well, makes sense, but this is just for show. the fed is incapable of change and articles like this will have no impact whatsoever.

mijev's picture

The slamming of gold and the Jackson Hole meeting is probably just coincidence, right?

Rainman's picture

It's so bad even Dollar Store sales miss due to a crackdown on able-bodied SNAP zombies in 7 States

Hitlery_4_Dictator's picture

Those evil repukes are blocking the coons payments! 

Déjà view's picture

Thanks for link...I did not realize there are any funds remaining from $787 billion stimulus legislation. They should have used remaining funds to retire debt!

detached.amusement's picture

 It only makes sense once you understand the fed is nothing more than a vehicle for theft

moneybots's picture

"A new inflation target would undermine the Fed’s commitment to any policy framework."


What policy framework? ZERO is not a policy framework.

shovelhead's picture

"Citizens are rightly concerned about the concentration of economic power at the central bank."

Gee, Dya think?

youngman's picture

They have had their 15 minutes of fame...and they like it....they want more fame and they think they have it....they are the market now...they have the power...people love power...and they will not let it go....they will print until other countries no longer want our dollars....then we will collapse...

You Only Live Twice's picture

The problem is somewhere above the Fed. Yellen maybe chairman, but she is essentially a chosen representative of the private shareholders that make-up the Fed, many of which are in Europe. But, even among these private shareholders, dissension is occuring. Rothschild spoke openly recently about his concerns with the current monetary policy being pursued by the Fed and the ECB, and that in itself is sign of trouble ahead. 

But the Fed's biggest headaches are yet to come and the shareholders are concerned. Russia, China, India and Iran are all moving away from the USD and towards the gold standard ever so slowly. And with prolonged low Oil prices, the Petrodollar System which allowed the exportation of debt and reduce inflation in the US is falling apart. The problem is not the inflation target, but how to control hyperinflation as the un-necessary dollars for Oil purchases come home to roost.

The move to a cashless society, which is well on the way, will be the way to prevent people from preserving their wealth.

The problem is that this goes way past the last century, it goes back hundreds of years when governments first made the mistake in Europe of getting indebted to the big private Jewish banking families. The Fed is just the end result of them moving their money out of Europe prior to WWI and then using the USD as their currency out of war ravaged Europe after WWII.

In the end, one must reap what they sow, and in this case, sadly, everyone will end up paying for what these people have done.

looseal's picture

How will a cashless society prevent preservation of wealth?

If it's too much to explain a link to an article or a book recommendation is appreciated.

Thanks in advance.

I woke up's picture

The majority of the population is taking it on the chin because of a select few

Hitlery_4_Dictator's picture

The majority of the population is taking it on the chin because they are too stupid and will-fulling ignorant of the real culprits and are blaming the wrong people.  The truth is out there and it's not hard to find. There really is no excuse anymore, really.  At this point, you have no one to blame but yourself.

snakehead's picture


REYKJAVIK, Aug 24 — The Central Bank of Iceland today cut its benchmark interest rate by half a percentage point to 5.25 per cent, saying inflation remained low despite rising wages and strong growth.

The bank increased its 2016 growth estimate to 4.9 per cent—a rise of 0.4 of a point compared to its forecast in May. It predicted 4.1 per cent growth in 2017.

“GDP growth is driven by strong income growth and improved households’ and businesses’ balance sheets. This is compounded by fiscal easing,” it said.

The statement confirms Iceland’s emergence from the 2008 financial crisis, which crushed a banking boom and plunged the country into recession.

On August 16, the country announced it planned to lift nearly all the remaining restrictions on capital controls it imposed on its citizens to prevent a currency collapse.

You Only Live Twice's picture

Excellent post! Just goes to show how handling things the right way pays off in the right way down the road.

o r c k's picture

Yes, it pays off big time, but the name "Iceland" is forbidden to be spoken  by any human outside of Iceland. The Fed. Reserve will track you down and force you to repent. (imagine the whole world wanting to prosper by copying Iceland - how ridiculous). Only debt, equals prosperity.

You Only Live Twice's picture

Agree! However, it's scary though how much we have allowed the Bankers to rule over us...

wisehiney's picture

"Mr Warsh has been reading that damn Zero Hedge again."

aqualech's picture

The reasons that they give for what they do make no sense, and I can tell you why.  They are LYING!  Americans beg for the FED to "save the economy" as the FED continues to plunder savings as well as build up a giant lein on the entire freaking society.

Mustafa Kemal's picture

I wonder if the Fed all goes to that bar in Jackson where the bar stools are saddles?


VarenneRiver's picture

I stopped reading after 2% inflation. 

Batman11's picture

Reading “Fault Lines” by Raghuram Rajan (published in 2010) and “The End of Alchemy” by Mervyn King (published in 2016) it is fairly obvious that thinking in Central Banker circles isn’t moving forwards.

It is fairly embarrassing that Wall Street did exactly the same thing as it did in 1929, in less than ten years from being freed from 1930s legislation.

It lent into an asset bubble to inflate prices until it blew up.

1929 – US stocks

2008 – US housing

This time Wall Street had derivatives for global contagion.

One might expect some sort of cover story, those bankers are morons.

But they are still trying to cure a debt problem with more debt, Central Bankers are no smarter than their Wall Street cousins.

Let’s find some real experts.

Twelve people were officially recognised by Bezemer in 2009 as having seen 2008 coming, announcing it publicly beforehand and having good reasoning behind their predictions.

He identifies four common aspects of their work:

1)  Concern with financial assets as distinct from real-sector assets

2)  With the credit flows that finance both forms of wealth

3)  With the debt growth accompanying growth in financial wealth

4)  With the accounting relation between the financial and real economy

In brief:

There is too much debt in the system and the repayments are sucking money out of the economy preventing normal growth.

Central Bankers still haven't figured out 2008 yet; don't waste your time listening to their convoluted rambling.

Get them out of Jackson Hole and get the 12 real experts in.

They understand the problem and can find a solution.

the grateful unemployed's picture

its really a global cabal, the conversation will go blah blah blah, and then someone will say, can you square this policy with your american banks? Janet, and she will nod, (probably)

she probably has a deal with the Chinese (who threaten to devalue if she raises rates) she is the bond beard in Belgium, the stock beard in Switzerland. Janet really gets around, a lot of stuff is done in her name, by Treasury (monetizing) the state department (transfer of funds) and the CIA (printing cash to buy ISIS weapons) there are probably some days she can't even get into her office for all the other people.

raising the inflation target is childs play, declare victory on 2% and move up 3%. (it doesnt affect policy does it?) at least its one benchmark they have achieved (sort of)

take this to the bank when things begin to normalize the fed will be behind the curve forever

aeslong's picture

as always, it was former........

besnook's picture

a financial system that depends upon ever increasing credit is mathematically destined to fail when credit issuance slows down or reverses. think of where the market would be if the central banks didn't buy those shares and companies didn't borrow money to buy back shares. the entire system collapsed in 2009. they have betting recovery is just around the corner since then instead of letting it collapse and starting over. the western world would be in real recovery by now. instead the central banks have cornered themselves, making a real collapse ten times worse than in 2008 because the reserve currency is in danger of collapsing now.



Bang on, besnook, but the FED & EU were not in position to let the system crash back in 08. Since 08 they have all deleveraged, and ringfenced the toxic waste so that the 99% has to eat it. Next stop is war so that documents are erased and new gangs of kleptocrats are installed. The end result will be civil war throughout the entire world.

spqrusa's picture

The interest rate Apartheid will continue until Banksters swing from the trees!

Elco the Constitutionalist's picture
Elco the Constitutionalist (not verified) Aug 25, 2016 12:16 PM

I consider any article that does not advocate abolishing the (((Fed))) to be seditious propaganda.