"Shadow Fed Chairman" Wash: Tolerate fiscal squandering and misjudgment of the economic situation, the Federal Reserve's difficulties are "being blamed"

**Source: Wall Street Journal**  

Amid rising tensions between the Federal Reserve and President Trump, Kevin Warsh—a potential successor to the Fed chair and a Trump ally—delivered a high-profile speech at a Group of 30 event in Washington on April 25.  

As a former Federal Reserve governor and once a candidate for Treasury Secretary under Trump, Warsh is regarded as the Fed's "shadow chair," making his remarks particularly noteworthy.  

In his speech, Warsh sharply criticized the Fed, accusing it of committing "systemic errors" by failing to curb the worst inflationary surge in a generation.  

Warsh argued that the Fed's independence is, in essence, a "conditional contract," and its current credibility crisis is self-inflicted—stemming from its power expansion during crises, major missteps in inflation control, and wavering stances on social issues, all of which have severely eroded public trust.  

### **Excerpts from Warsh's Speech:**  

Over a decade ago, I served as a Federal Reserve governor. Those were extraordinarily challenging times, and our decisions had both successes and failures. But the core debate—then and now—has always revolved around the boundaries of the Fed's authority.  

During the 2008 financial crisis, after a tense weekend meeting, we rolled out unconventional policy support. Former Chairman Paul Volcker remarked at the time: "The Fed has pushed to the limits of its statutory authority, shaking the core principles central banks have upheld for decades." His words were like a high-stakes pitch in baseball—a stern warning from a veteran insider, urging successors not to overstep.  

Yet this warning was ultimately ignored. Today, the Fed is deeply entangled in the U.S. government's economic policymaking, blurring its role. In my view, this "round-the-clock, all-encompassing" power expansion is causing systemic distortions in macroeconomic policy. When a central bank tries to act as an "economic master planner" rather than focusing on its core mandate, the misalignment creates a double failure: it not only neglects its statutory duty to maintain price stability but also fuels unchecked federal spending. Worse, this overreach is undermining the very legitimacy of monetary policy independence.  

The U.S. fiscal trajectory is now dangerously unsustainable, particularly after the post-pandemic spending spree. The Fed bears responsibility: it cheered fiscal stimulus during economic downturns but remained silent on fiscal discipline during recovery. Monetary policymakers should stick to their lane—if they insist on commenting on fiscal policy, they should at least remain consistent.  

As a designer of quantitative easing (QE), I still believe it was necessary during crises. In 2008, we cut rates to zero and innovated with asset purchases to revive frozen markets—a prudent and essential move.  

But the post-crisis policy inertia is alarming. By mid-2010, the economy was recovering strongly, and financial markets had stabilized. Yet the Fed launched QE2, dragging the central bank into the political quagmire of fiscal policy. I opposed this vehemently and ultimately resigned. Today, QE has morphed into a near-permanent tool (the current $7 trillion balance sheet is ten times its size when I joined), blurring the lines between monetary and fiscal authority.  

The Fed's "mission creep" extends beyond traditional domains. In recent years, it has waded into climate policy and social equity, positioning itself as a "jack-of-all-trades": in 2020, it loudly joined the "Network for Greening the Financial System," pledging to lead climate finance work—only to quietly exit in 2025 when political winds shifted. That same year, its "inclusive employment" policy redefined its statutory "maximum employment" mandate as an "equity-driven goal," implying tolerance for higher inflation to boost jobs for specific groups. Tellingly, when pressed on the difference between old and new definitions, Fed officials dodged clarity—if it’s mere wordplay, it reeks of political opportunism; if substantive, shouldn’t Congress have a say?  

More troubling, these forays often backfire: the very groups "inclusive employment" aims to protect end up bearing its heaviest costs. When the central bank overreaches beyond its expertise, its core ability to ensure price stability and full employment weakens.  

For four decades, price stability was the Fed's "golden shield." Had it maintained that record, the central bank might have earned broader policy latitude. But recent inflation failures exposed a grave strategic misalignment—as the Fed obsessively expanded its role, its risk resilience weakened from overextension.  

There are many misconceptions about central bank independence. It is not an innate privilege but an institutional design to achieve specific policy goals. The current danger is that whenever regulatory policies face scrutiny, the Fed hides behind "independence"—yet its claims of autonomy in banking oversight ironically undermine public trust in monetary policy independence. Worse, when the central bank routinely encroaches on fiscal authority or takes sides on social issues, the foundation of its core independence erodes.  

One thing is clear: the Fed's independence is a "conditional contract." The U.S. constitutional system tolerates its special status only if it sticks to its mandate and delivers results. History shows that public hatred of inflation coexists with innate distrust of overreach. Today’s credibility crisis is self-inflicted—from power grabs during crises, to inflation failures, to flip-flopping on social issues, the Fed has overdrawn its trust account.  

To recover, a strategic reset is imperative: only by reclaiming price stability as its core mission and rebuilding credibility in its expertise can the Fed restore true independence. After all, central banks are not ivory-tower academics—their entire raison d'être lies in delivering tangible public benefits.  

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