Legend has it that Deng Xiaoping — purged during the Cultural Revolution and later rehabilitated to the point of succeeding Mao Zedong — described his political survival strategy as follows: “Never express opinions until you can issue orders.”
Kevin Warsh, the financier chosen by Donald Trump to succeed Jay Powell as chair of the Federal Reserve, has taken the opposite approach.
Dozens of his public positions are on record, often contradictory, with an apparent common thread: remaining aligned with whichever political leadership happens to be in power (a chart circulating online catalogues his reversals).
Deng’s maxim might be adapted for Washington: never express consistent opinions if you aspire one day to give orders.
Observers are now trying to decipher what Warsh actually believes on the issues that matter most: short-term interest rates set by the Federal Reserve, the direction of the US dollar, and above all the central question — how will he act in the next financial crisis?
Will he follow the example of Ben Bernanke, who during the 2008 global financial crisis used every available instrument — including emergency lending and large-scale asset purchases — to stabilise the system?
Or will he resemble the laissez-faire central bankers of the 1930s who, trusting in the economy’s capacity for self-correction, stood aside as the Great Depression unfolded?
A crisis will come.
Trends such as the expansion of crypto-assets, financial deregulation and the growth of shadow banking suggest that vulnerabilities may already be building. When that moment arrives, the reaction of the Federal Reserve will be decisive.
During the years of financial crisis and deflation fears, when Warsh served on the Board of Governors of the Federal Reserve, he spoke out against large-scale asset purchases — the policy known as quantitative easing (QE), whereby the central bank buys government bonds and other securities to inject liquidity into the economy.
He argued that QE risked fuelling inflation and undermining market discipline, though he never formally dissented in a vote. Today, with the US economy running strongly and inflation above the Federal Reserve’s 2 per cent target, he argues that policy interest rates should be reduced.
Warsh has defended the independence of the Federal Reserve, but primarily in relation to monetary policy decisions. He advocates a narrowly defined central-bank mandate focused strictly on monetary policy and a smaller balance sheet, achieved by unwinding the large stock of Treasury and mortgage-backed securities accumulated during past crises.
That is the record. But if the underlying logic is political positioning, parsing earlier statements may be of limited value.
As chair of the Federal Reserve, Warsh would no longer be accountable to the politicians whose favour he may once have sought.
Young and ambitious, he is likely to consider not only his career prospects but also his historical legacy. In four years he will require renomination, potentially by a different president of uncertain political affiliation.
Such shifting incentives could push him closer to the traditional model of an independent central banker than his past rhetoric suggests.
He may accommodate political pressures on issues that fall outside the strict domain of monetary policy — for instance by allowing the executive branch greater latitude in shaping financial regulation.
But on interest-rate policy and balance-sheet decisions he will need to proceed cautiously. Not only must he avoid being outvoted by the Federal Open Market Committee — the body within the Federal Reserve that sets US monetary policy and which he would chair but not control — he must also guard against destabilising market reactions.
Reducing the Federal Reserve’s balance sheet — by selling or allowing securities to mature without reinvestment — tends to push up long-term bond yields. That would increase borrowing costs for the US Treasury, already heavily indebted. If combined with cuts to short-term policy rates, the result could be a self-defeating policy mix: short-term rates falling while long-term rates rise.
Financial markets have long interpreted such a configuration as a sign of a weak or insufficiently credible central bank — precisely the impression a new chair would wish to avoid, especially at the outset of his mandate.
Another crucial test will be relations with other major central banks, such as the European Central Bank and the Bank of Japan. Many western central bankers welcomed Warsh’s appointment, perhaps relieved that more controversial alternatives were avoided. Yet many of those same officials had publicly expressed support for Powell, whose leadership Warsh repeatedly criticised.
International central-bank co-operation often involves the provision of US dollars to foreign central banks through currency swap lines and emergency credit facilities. These arrangements are essential tools for preventing and containing global financial crises.
However, policymakers within a US administration committed to an “America First” agenda may view such mechanisms as inconsistent with national priorities. The key question is whether Powell’s successor will have both the conviction and the political strength to maintain these arrangements on the same terms as in the past.
In truth, Kevin Warsh remains an unwritten book. His past oscillations leave ample room for manoeuvre. Many orthodox economists are already voicing sharp criticism; perhaps he merits the benefit of the doubt.
Yet a fundamental uncertainty persists: is a personality so “strategic” — in less charitable language, “opportunistic” — the most suitable to hold the helm of the Federal Reserve as turbulence looms for the global financial system and the world economy?
A previous version of this article was published by Il Foglio
