Kevin Warsh is testifying on Tuesday about his nomination to be chairman of the Federal Reserve, with senators likely to press him on his views of the Fed’s 2% inflation target given the persistent price pressures affecting the U.S. economy since the pandemic.
The 56-year-old Warsh, who served as a Fed governor from 2006 to 2011, will testify before the Senate Banking Committee as senators weigh his nomination to succeed current Fed Chair Jerome Powell, whose term leading the central bank is due to expire in May.
Warsh offered an overview of how he views the price stability component of the Fed’s dual mandate in a written copy of his opening statement, which FOX Business viewed in advance of his testimony.
In his prepared remarks, Warsh says he supports the Federal Reserve’s dual mandate of promoting price stability as well as full employment, though he didn’t specifically discuss the Fed’s policy target of keeping inflation at 2% over the long-run.
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“First, Congress tasked the Fed with the mission to ensure price stability, without excuse or equivocation, argument or anguish. Inflation is a choice, and the Fed must take responsibility for it,” Warsh wrote.
“Low inflation is the Fed’s plot armor, its vital protection against slings and arrows,” he said.
“So, when inflation surges – as it has done in recent years – grievous harm is done to our citizens, especially to the least well-off. They lose purchasing power. Their standard of living falls. They may also lose faith in our system of economic governance, raising doubts whether monetary policy independence is all it’s cracked up to be,” Warsh wrote.
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Warsh discussed his view of monetary policy goals in a 2023 hearing before the British House of Lords’ Economic Affairs Committee and said he views price stability as an imperative, but is skeptical of the ability to measure inflation precisely, and so he prefers a range-based inflation target.
“Price stability is the North Star. Without stable prices, it is almost impossible to have full employment. It is also almost impossible to have economies that are growing at their full potential. When prices are volatile… it is difficult for households and businesses to make the prudent decisions that they might like,” he said.
“Frankly, we would not know the difference whether inflation was running at 1.7%, 2.0% or 2.3% in the United States or in the United Kingdom because we do not measure it that precisely,” Warsh said. “Economics is not physics – at least not yet.”
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Warsh said he tends to “prefer ranges versus point estimates, in part because of measurement error and in part because I think broad price stability can never be that precise.”
He added that, in general, he thinks viewing inflation that precisely “led many of the central banks to overly stimulate economies a few years ago,” and led to decisions that contributed to inflation running well above target.
“I broadly favor ranges. Price stability, in the numerical definition, will change in the times. The structures in the global economy are changing even as we speak. It strikes me that agreeing on some permanent basis to 2.0% is asking for trouble,” Warsh said.
Inflation peaked in the U.S. at 9.1% in June 2022 and is currently around 3%, having risen over the last year due to tariffs and the recent impact of the recent energy shock caused by the Iran war.
The Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) index, was 2.8% in February on an annual basis. Data from March is due at the end of next week.
Another popular inflation gauge, the consumer price index (CPI), showed inflation jumped to 3.3% in March after a 2.4% reading in February due to the impact of the war on energy markets.
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