Kevin Warsh, the new chairman of the Federal Reserve, has explicitly stated his intention to emulate his predecessor, Alan Greenspan, who led the Fed for nearly two decades until 2006. Warsh, who vowed to lead a "reform-oriented" Fed, singled out Greenspan as a role model at his swearing-in ceremony, promising to fill the role with "energy and purpose, just the way Chairman Greenspan did." This emulation extends to how the Fed communicates its interest rate plans and the data it prioritizes for policy decisions.
Greenspan's tenure, which ended with his death at age 100 on Monday, was lauded by Wall Street and Washington for guiding the central bank through significant economic expansion and stress, establishing its credibility. He was known for his mastery of monetary policy, particularly in the late 1990s, when he recognized productivity gains before others. Greenspan also shifted the Fed towards greater transparency, starting to disclose policy decisions publicly in 1994 and issuing announcements after every meeting by 1999, moves that were expanded upon by his successors.
However, Greenspan's legacy is not without criticism. He is often blamed for allowing asset bubbles to form, most notably culminating in the 2008 global financial crisis. Critics, including former Vice Chair Alan Blinder, point to his strong belief in laissez-faire economics as contributing to a lack of regulation and supervision, allowing financial risks to build unchecked. Despite initially being known for cryptic pronouncements, Greenspan's push for transparency was a significant part of his chairmanship.
Warsh, taking over in a uniquely complicated environment with inflation exceeding the Fed's 2% target, is already facing challenges. He aims to scale back some communication changes made by Greenspan's successors, testing this approach in his first policy meeting with a condensed statement and avoiding questions about his economic outlook. This contrasts with the increased transparency under Ben Bernanke and Jerome Powell, who introduced practices like the "dot plot" and news conferences after every policy meeting. Warsh's focus is on market participants making their own judgments based on economic data, possibly leading to more volatile markets but lower interest rates for consumers and businesses in the long run.
Warsh's strategy aligns with Greenspan's nuanced approach to data, emphasizing the importance of looking at the "right data" and finding inconsistencies, as highlighted by Mary C. Daly, president of the Federal Reserve Bank of San Francisco. Greenspan's trust in his instincts, particularly regarding a productivity boom in the late 1990s due to computing technology, allowed him to resist raising rates despite falling unemployment, which later proved beneficial as prices did not rise. Warsh draws parallels to this, suggesting that the boom in artificial intelligence today could similarly allow for faster growth and lower interest rates without triggering inflation.
