Kevin M. Warsh has long singled out Alan
Greenspan, who died on Monday, as the central banker he wants to exemplify.
·
New
Federal Reserve chairman Kevin M. Warsh highlighted Alan Greenspan as his role
model during his swearing-in.
·
Warsh
pledged to lead the Fed with the same energy and commitment that characterized
Greenspan’s tenure.
·
Greenspan
led the Federal Reserve from 1987 to 2006.
·
He is
credited with guiding the U.S. economy through periods of strong growth and
financial stress.
·
However,
critics argue that policies during his tenure contributed to the dot-com bubble
and the housing bubble that preceded the 2008 financial crisis.
·
Inflation
remains above the Fed’s 2% target.
·
Artificial
intelligence is reshaping productivity and labor
market dynamics.
·
Financial
risks are increasing in areas such as private credit.
·
President
Donald Trump has repeatedly pressured the Fed on interest-rate policy.
·
Before
Greenspan, the Fed did not publicly announce policy decisions.
·
In
1994, he began publicly disclosing interest-rate decisions.
·
In
1999, the Fed started issuing statements after every policy meeting, even when
rates were unchanged.
·
He
supported giving markets short-term clues about policy direction.
·
However,
he was skeptical of detailed long-term guidance about
future interest rates.
·
Ben S.
Bernanke introduced the "dot plot" in 2012, showing policymakers'
future rate expectations.
·
Jerome
H. Powell expanded press conferences to follow every Fed meeting.
·
He
believes the Fed should provide fewer signals about future policy.
·
His
first policy meeting featured a shorter and simpler statement.
·
However,
his reluctance to discuss economic scenarios created uncertainty among
investors and economists.
·
Trump
has consistently pushed for lower interest rates.
·
Some
economists argue Warsh would strengthen perceptions of Fed independence by more
openly explaining his policy reasoning.
·
He
monitored unusual data points, including:
o Scrap metal prices.
o Sales of men's underwear.
·
He
believed these indicators could provide early signals about economic trends
before official statistics.
·
During
the late 1990s, unemployment fell while growth accelerated.
·
Instead
of aggressively raising rates, Greenspan argued that advances in computing
technology were boosting productivity.
·
Later
productivity data largely confirmed his assessment.
·
Former
colleagues praised his willingness to challenge conventional interpretations of
economic data.
·
He
frequently consulted businesses and industry leaders to understand emerging
economic trends.
·
Warsh
believes artificial intelligence could have effects similar to the computer
revolution of the 1990s.
·
He
argues AI-driven productivity gains may allow faster growth without triggering
excessive inflation.
·
This
could justify lower interest rates than traditionally expected.
·
Critics
argue AI investments may initially increase inflation.
·
They
note that the 1990s benefited from globalization and other disinflationary
forces that are weaker today.
·
The
timing and magnitude of AI productivity gains remain uncertain.
·
Some
analysts fear the AI boom could resemble the late-1990s dot-com bubble.
·
Excessive
investment and overly optimistic expectations could create financial
instability if returns fail to meet expectations.
·
Critics
argue his strong belief in market self-regulation allowed systemic risks to
build before the 2008 financial crisis.
·
Insufficient
oversight of financial institutions contributed to vulnerabilities in the
banking system.
·
Financial
regulators are easing some restrictions imposed after the 2008 crisis.
·
Experts
warn that growing risks in private credit and other less-regulated sectors may
create future vulnerabilities.
·
Kevin
Warsh is drawing heavily on Alan Greenspan’s legacy, particularly his emphasis
on judgment, productivity-driven growth, and limited policy guidance.
·
While
Greenspan's successes in managing the 1990s economy remain influential, his
failures in financial oversight serve as a cautionary lesson as the Fed
confronts inflation, AI-driven economic change, and rising financial risks.
At
his swearing-in ceremony as chairman of the Federal Reserve last month, Kevin
M. Warsh singled out just one of his predecessors as a role model for running a
central bank: Alan Greenspan, who led the Fed for nearly two decades before
stepping down in 2006.
“Like
Alan, I intend to fill the role of chairman with energy and purpose, just the
way Chairman Greenspan did, faithful to the mission and the very best
traditions of the Fed,” Mr. Warsh said in his first remarks in the top job.
Mr.
Greenspan died on Monday at age 100. But Mr. Warsh, who has vowed to lead a
“reform-oriented” Fed, is carrying on his legacy in a number of important ways.
That spans how the Fed communicates about its plans for interest rates to the
data it ascribes the most weight to make policy decisions.
Mr.
Greenspan’s tenure earned him plaudits on Monday across Wall Street and
Washington. In its own statement, the Fed celebrated him for guiding the
central bank through “periods of significant economic expansion as well as
periods of considerable stress” while helping to “establish the credibility
that remains one of the Federal Reserve’s most important assets.”
Yet
Mr. Greenspan’s tenure was not without its blemishes given the bubbles he
allowed to form while overseeing the central bank, the most serious of which
culminated in the 2008 global financial crisis.
Mr.
Warsh, who inherits a uniquely complicated environment as Fed chairman, is
already facing his own tests. Inflation is too high and has been above the
central bank’s 2 percent target for far too long. There are potentially seismic
changes being ushered in by the boom in artificial intelligence, which is
fundamentally changing how policymakers think about productivity and the labor market. The Fed is also in the midst of scaling back
many of the rules and regulations reining in Wall Street as financial risks are
building in more opaque parts of the system, like private credit. And President
Trump, who nominated Mr. Warsh for the job, has for over a year engaged in a
relentless pressure campaign aimed at the central bank and its ability to set
policy free of political meddling.
Seth
Carpenter, who worked as an economist at the Fed under Mr. Greenspan and is now
chief global economist at Morgan Stanley, said it would be a mistake to
remember Mr. Greenspan, or any Fed chair, as having all the answers.
“I
don’t think there’s any way you can read the Alan Greenspan record and say, ‘As
long as I know what he did at every point in time, I will get everything
right,’” Mr. Carpenter said. “That’s clearly not true. I think there was a lot
of judgment. I think there was lot of healthy skepticism.
But there was probably some luck in there as well.”
Careful Communciations
Today,
Mr. Greenspan is often remembered for his cryptic pronouncements that left the
public guessing about his views — an image he embraced.
“Since
I’ve become a central banker, I’ve learned to mumble with great incoherence,”
he told Congress in 1987. “If I seem unduly clear to you, you must have
misunderstood what I said.”
But
despite his oracular reputation, Mr. Greenspan moved the Fed toward greater
transparency. When he took over as chairman in 1987, the central bank did not
announce its policy decisions, leaving investors to parse financial market
moves to determine whether or not officials had acted.
In
1994, however, Mr. Greenspan decided the Fed should begin disclosing its policy
decisions publicly. In 1999, he directed the central bank to issue
announcements after every meeting, even if rates were left unchanged.
“He
didn’t want the markets confused about what we were doing,” said Donald Kohn,
who worked alongside Mr. Greenspan and later served as a vice chair of the Fed.
Mr. Greenspan was even inclined to provide so-called forward guidance, meaning
signals about what the central bank might do with rates. “It was short-term,”
Mr. Kohn said. “He was highly skeptical of long-term
forward guidance.”
Mr.
Greenspan’s successors expanded on this pivot and embraced significantly more
transparency. By 2012, under Ben S. Bernanke, the Fed was releasing officials’
estimates for rates in the years ahead in what became known as the “dot plot.”
And shortly after Jerome H. Powell took over as chair in 2018, he introduced
news conferences after each of the Fed’s eight policy meetings. Previously, the
news conferences had been held quarterly.
Mr.
Warsh, who served as a Fed governor between 2006 and 2011, wants the central
bank to reverse course on some of these changes so that officials send fewer
signals about the outlook. He tested that approach last week at his first
policy meeting to mixed reviews. At that meeting, the Fed opted to hold rates
steady despite mounting support internally for higher borrowing costs this year
to quell inflation.
The
central bank’s condensed policy statement was cheered for its succinctness and
simplicity. But Mr. Warsh’s decision to dodge any questions related to his
thinking about the economic backdrop and how the Fed should respond if the
circumstances were to change sowed some doubt about his handling of the job.
Mr.
Warsh took over as chairman amid concerns about how independently he would
operate from the president, who has long called for the Fed to lower rates. Mr.
Warsh made clear that the central bank’s most important task would be getting
inflation under control. But for Michael Feroli, chief U.S. economist at
JPMorgan who worked as a Fed economist during Mr. Greenspan’s tenure, that
independence would have been much more assured if Mr. Warsh explained his
thought process.
“I
could buy the independence a lot more if he told me, ‘These are the arguments,
the pluses and the minuses,’” Mr. Feroli said.
‘Greatest Fine Tuner in
History’
Mr.
Greenspan, who ran a small economic consulting firm before his time at the Fed,
was known for his faith in offbeat indicators that he believed could provide
signals about the direction of the economy before better-known measures like
the unemployment rate and gross domestic product. He tracked the price of scrap
metal as an early signal of industrial production; sales of men’s underwear
could provide a window into consumer sentiment. (During tough economic times,
men would try to get a few more uses out of their old boxer shorts before
replacing them, Mr. Greenspan theorized.)
“He
was masterful in his inclinations to try to come up with better ways of
measuring what was going on,” said Peter Hooper, who worked as an economist at
the Fed under Mr. Greenspan and now leads research at Deutsche Bank. “He had
just a knack for getting a sense of which way the economy was leaning at a time
when some of the macro series were pointing in a different direction.”
Perhaps
the most notable example of Mr. Greenspan trusting his instincts came in the
late 1990s, when growth picked up and the unemployment rate fell. Such
conditions would ordinarily lead the Fed to raise interest rates to try to
prevent a burst of inflation.
Mr.
Greenspan, however, argued that computing technology was causing a productivity
boom, allowing the economy to grow more quickly without causing prices to rise.
He resisted raising rates until near the end of the decade. Productivity data
eventually bore out his instincts.
“Greenspan’s
innovation wasn’t looking at more data; it was looking at the right data —
finding inconsistencies in what he saw and working to resolve them,” Mary C.
Daly, president of the Federal Reserve Bank of San Francisco, recalled in a
February speech. His success, she added, resulted from his “willingness to
listen to businesses, hear their ideas, use data and evidence to test them, and
invite others to do the same.”
Alan
Blinder, who served as Mr. Greenspan’s vice chair between 1994 and 1996, called
him “the greatest fine tuner in history.”
“Greenspan
will, justly, be remembered for his expert and successful steering of monetary
policy for 18 years, especially in the late 1990s, when he saw the productivity
gains before others,” Mr. Blinder said.
Lesson for the A.I. Boom
Mr.
Warsh has argued that Mr. Greenspan’s approach to the ’90s carries lesson for
policymaking in the present day. He has said that artificial intelligence, like
the personal computer in Mr. Greenspan’s era, will allow for faster growth, and
that, as a result, the Fed will be able to keep interest rates lower without
allowing inflation to spin out of control.
Many
economists, including some inside the Fed, question those parallels, however.
They argue that the wave of A.I. investments could be driving up inflation in
the short-run, even if the technology leads to faster productivity growth over
time. And they point to differences between Mr. Greenspan’s era and today,
noting that in the ’90s, globalization and other forces were pushing down
inflation.
Some
economists also worry that the A.I. boom could more closely resemble a
different episode from Mr. Greenspan’s tenure: the dot-com bubble.
Mr.
Greenspan famously warned of “irrational exuberance” in the stock market in a
1996 speech at the American Enterprise Institute. Investors continued to pour
money into unprofitable internet companies for three more years before the
bubble burst, sending stocks plummeting and helping to cause a recession.
The
housing bubble of the following decade was even more damaging, setting off a
global financial crisis and causing the worst recession since the Great
Depression. That crisis struck after Mr. Greenspan left the Fed, but critics,
and even some supporters, have long argued that his faith in markets and his skepticism of government regulation allowed risks in the
financial system to grow unchecked for too long.
“His
weak spot, sadly, was bank regulation and supervision, where his deep belief in
laissez-faire led him to ignore problems that were building up in the financial
system in the years prior to the 2007-2009 financial crisis,” Mr. Blinder said.
“That left a big blot on an otherwise stellar record.”
Mr.
Kohn, a former Fed vice chair, drew parallels to the shift underway across
regulators, who have embraced much more lenient rules for Wall Street after
years of trying to tighten the reins during the Biden administration.
“I’m
concerned about how far it’s swinging back and whether the authorities doing
the swinging back are taking account of the potential systemic risk,” Mr. Kohn
said.