‘I almost fell out of my chair’: Fed stalwart Claudia Sahm fears Kevin Warsh’s policies could undo 20 years of progress

Claudia Sahm, a respected economist and former Federal Reserve insider, has expressed concern about Kevin Warsh’s potential leadership style at the Fed. Her concerns are not unfounded; Warsh’s testimony before the Senate Banking Committee raised more questions than answers for Sahm.

Warsh’s views on forward guidance have sparked alarm among some economists. In particular, his statement that “I don’t believe in forward guidance” was met with skepticism by Sahm, who has worked closely with the Fed during its evolution towards more transparent communication. The development of forward guidance over the past 20 years has been a deliberate effort to hold the central bank accountable and provide clarity on monetary policy decisions.

Warsh’s views on this matter seem at odds with this progress. He suggests that the dot plot, a key tool in forward guidance, is imperfect and that the Fed should be more reactive to data rather than tied to predetermined forecasts. This raises questions about his commitment to transparency and accountability. Sahm notes that “you really have to bring it in terms of a better model, a better idea” – highlighting the difficulty in improving upon existing systems without offering viable alternatives.

Warsh’s approach to forward guidance is also at odds with his own experience working within the Fed. As one of the youngest people ever to serve on the central bank’s board, Warsh was intimately familiar with the institution’s complexities and challenges. His resignation from the Fed in 2011, followed by a decade-long hiatus before returning as an advisor, suggests that he understands the difficulties of navigating the Fed’s internal politics.

Sahm does not expect Warsh to be the “agent of chaos” some insiders fear. Instead, she sees his return to the Fed as an opportunity for growth and learning. As Sahm notes, “The economics here are really hard,” and it is how Warsh engages with these challenges that will determine whether he can lead the Fed effectively.

The disagreement on the rate-setting Federal Open Market Committee has been characterized by some analysts as a performance rather than genuine dissent. However, if Warsh’s leadership style is indeed more reactive to data rather than tied to predetermined forecasts, this could have significant implications for monetary policy decisions.

As the Senate Banking Committee continues its review of potential nominees for Fed chair, it is essential that they carefully consider the implications of Warsh’s views on forward guidance and his approach to leadership. Sahm’s concerns about the potential impact of Warsh’s policies on 20 years of progress at the Fed should not be dismissed.

The success or failure of Warsh’s tenure as Fed chair will depend on how he navigates the institution’s complexities and challenges. If his views on forward guidance are indeed a departure from the Fed’s commitment to transparency and accountability, it could have far-reaching consequences for monetary policy decisions and the broader economy. Sahm’s words – “I almost fell out of my chair” when she heard Warsh’s testimony – underscore the gravity of her concerns.