"The reality is,"Kevin Warsh exclaims, "QE policy favors those with big balance sheets, those with risk appetites, and access to free money," while real people "are still looking around and saying what is fed policy doing for me." The problem, he explains, is a disconnect between what markets are discounting about the future and the Fed's credibility with regard their apparently divergent forecasts for unemployment, growth, and interest rates. In a little under 90 seconds, Warsh explains the dilemma and sums up the Fed perfectly, "they're just talking, rather than acting."
"The challenge for [The Fed] in December is to convince the markets that both their economic forecasts are right - that is the economy will be growing at 3.5% in 2016, the unemployment rate will be in the fives - and yet, interest rates still at zero.
My view is one of those has to give.
If the economy is roaring as much as they say, markets will not believe that the Federal Reserve will keep the Fed Funds rate at zero in that environment. The alternative is the economy is stuck at around 2% growth in which case it is possible that rates and yields stay quite low."
90 Quick seconds of uncomfortable enlightenment...
His later comments did not entirely suggest confidence in the short-term future...
"Financial markets tend to test new chairmen. They did it to Paul Volcker. They did it to Alan Greenspan," Warsh said. "They challenged Ben Bernanke and his new team eight years ago."
"I've got every bit of confidence that [Yellen] is going to realize that being chairman is frankly a very different set of responsibilities ... where most of us get to sort of chatter from the cheap seats. She's got to make the tough decisions."