Chartbook 444: Rolling back the "big Fed" - Kevin Warsh, the Hoover Institution & the conservative critique of the administrative state.

Kevin Warsh, the presumptive new chair of the Federal Reserve, is no economist, nor monetary policy wonk. He is a Stanford- and Harvard-educated lawyer with Wall Street experience, who is connected to Republican circles not only by way of education and business experience, but also through marriage. Warsh’s father-in-law is Ronald Lauder, the cosmetics billionaire. In 2006 Warsh was catapulted by the Bush administration from a relatively modest position in the White House to become the youngest nominee for the Fed Board. After a tumultuous and controversial time at the heart of the financial crisis in 2007-2009, having been passed over for the top job at the New York Fed in 2009, Warsh resigned from the Board in 2011 voicing disagreement with Bernanke’s policy of QE2.

As Trump moved to the forefront of Republican politics in 2017, Warsh was immediately in the running for a top job. Ronald Lauder is reputed to be a close associate of Trump. In 2017 when Warsh was first considered by Trump as a replacement for Janet Yellen, Politico ran a piece on Warsh’s family connections, which described the Trump-Lauder connection as follows:

Ronald Lauder, Estée Lauder’s younger son, has known Trump for five decades, ever since they attended the Wharton School of the University of Pennsylvania. The two have since run in similar circles, both in New York and in Palm Beach, Florida, where they have homes. Trump even launched a cologne in 2004 called “Donald Trump, the Fragrance” in partnership with Estée Lauder. Lauder, a former ambassador to Austria with a Forbes-estimated net worth of $3.5 billion, has spoken regularly with the president since Trump took office. According to a person familiar with the conversations, they mostly discuss Middle East issues; Lauder is president of the World Jewish Congress.

For those interested in vintage perfumes, here is a review of the Lauder-Trump collab from 2004.

Source: Weird Universe

In 2017 Trump picked Jerome Powell. He would come to regret it. By last year, given the mounting levels of sycophancy in the Trump bunker, there was general relief that his final choice to replace Powell fell on Warsh, rather than an even less substantial figure, such as Kevin Hassett.

In the months to come, there will be much to say about Warsh’s stance on interest rates, the Fed’s balance sheet and technical issues like the dot plot and forward guidance. In the latest episode of Ones and Tooze, Cam and I cover some of those questions.

But what I find most interesting about Warsh in recent years are not his views on economic policy - his criticisms of 2010s QE, or re-litigating Fed policy in 2008 - but his convergence, by way of the Hoover Institution at Stanford, with conservative critiques of the administrative state.

Reading Warsh’s speeches and papers of the last five years, it would seem that his desire to see the Fed “return to its lane” has less to do with the standard 1990s arguments for central bank independence than with the increasingly vociferous campaign on the American right to roll back the administrative state.

The prime target of this attack is the expansion of big government since the great society programs of the 1960s. But, in the historical demonology of the right, the rot started far earlier, with the first self-consciously liberal President of the 20th century, Woodrow Wilson. The Fed, established by Wilson in 1913, is thus prima facie suspect.

A speech given by Warsh to the G30 in April 2025 offers a variety of glimpses of his broader conservative vision.

modern Wilsonians may be discomfited by my words…granting boundless power to government agencies to solve the world’s problems does not square with my disposition.

And he goes on to remark:

The Fed has acted more as a general-purpose agency of government than a narrow central bank.

“Wilsonian”, “general-purpose”, “government agencies” - These are dog whistles for the pack that is waging war on America’s administrative state.

For Warsh, it is acceptable that the Fed should play the role of crisis fighter. But the crucial precondition is that once the crisis passes, it should retreat. This, to his mind, is precisely what did not happen after 2009.

Each time the Fed jumps into action, the more it expands its size and scope, encroaching further on other macroeconomic domains. More debt is accumulated…more capital is misallocated…more institutional lines are crossed… risks of future shocks are magnified…and the Fed is compelled to act even more aggressively the next time. Simply stated, path dependency is driving policy. We need to be careful that it’s not driving into a ditch. It’s not just dangerous for our economy…its risky business for central bank legitimacy …and riskiest for our citizenry.

The Fed often presents itself as humble and technocratic, hewing closely to the remit. They say they take fiscal policy decisions as given, and then react. But, it’s no longer obvious whether monetary policy is downstream or upstream from fiscal policy. Irresponsibility has a way of running in both directions. Fiscal dominance--where the nation’s debts constrain monetary policymakers—was long thought by economists to be a possible end-state. My view is that monetary dominance – where the central bank becomes the ultimate arbiter of fiscal policy—is the clearer and more present danger. The line between the central bank and the ostensible fiscal authority has grown harder to identify.

This, you might say, is a conventional conservative critique of the creeping expansion of big government. But, for Warsh, the rot goes deeper. Nor is he afraid to to paint with a broad historical brush.

The Enlightenment elevated the role of reason and autonomy in decision-making.7 Kant, Locke and Rousseau-- none conceived of a central bank like ours. Still, a fundamental precept of their thinking would be helpful to the modern Fed: a fierce resistance to whims. Central bankers and bandwagons should be strangers. It would better for the Fed’s long-term success to focus on the time-honored and the enduring…rather than the fashionable and the fleeting. … Others can adjudicate whether matters of cultural import are in the province of the political class or of civil society. But the Fed’s business, it is not. “Climate change” and “inclusion” are politically-charged issues. People of good conscience have their own views and motivations. Elected officials are tasked with evaluating data, synthesizing views, charting policy, and granting authority, if desired, to executive branch agencies.8

Climate is one of his bug bears.

First, in late 2020, the Fed joined the “Network of Central Banks and Supervisors for Greening the Financial System.” The Fed said it is “active, and in many cases, plays a leading role in climate related work.”10 A year later, the Fed chief said the central bank had “intensified our focus and supervisory efforts on evolving threats such as climate change.”11 Fast forward to January 2025-- in a somewhat different political environment-- the Fed withdrew from the “greening” group, and substantially changed its tune.

Warsh’s selection of issues is not accidental, of course. The right-wing is climate skeptical. But his broader point is that the Fed should not be following fashion, whatever it is.

He applies the same rhetorical maneuver to another key issue for the Yellen and Powell Fed’s - the balance between the two mandates i.e. price stability and full employment:

in August 2020, the Fed announced a newfangled monetary policy framework. In my view, the new regime was the Fed’s ‘end of history’ declaration…high inflation was vanquished…the dominant risk was that prices would be too low. As part of the new regime, the Fed redefined its legislative remit of “maximum employment” as a “broad-based and inclusive goal.” The new nomenclature of ‘inclusive employment’ was understood to underscore Fed’s willingness to accept higher inflation so that certain groups would achieve higher rates of employment.

Again, this is a dog-whistle. By “certain groups”, what is meant are black Americans - in the recovery from COVID in 2021 Fed chair Powell was reported to be focused on a broader dashboard of labour market indicators including black unemployment which is a highly sensitive index of labour market “slack”. Warsh is saying that in future he will insist on the priority of fighting inflation even if this comes at the expense of black unemployment. He isn’t going to say this out loud. He doesn’t need to. The audience he cares about understands. Again, rather than spelling out the political logic of his own position he generalizes, pointing out the inconsistency of the Fed position:

More recently, however, Fed leadership has sounded considerably more ambiguous whether the Fed’s new definition of full employment was different from the old. If it’s no different in practice, then was the new language simply a political nod? If the new definition is different, then shouldn’t Congress have some say?

And Warsh then shifts gear once more, this time to foundational issues of political organization:

There’s a final reason to be uncomfortable with the Fed’s focus on groups. Some in our profession have tended to de-emphasize individuals, as if larger forces are in charge. In my view, individuals, rather than groups, are at the core of civil society.15 A successful Fed policy regime should not view the individual as a cog in the macroeconomic machine, or as a member of some static demographic group. What an individual chooses to do as he or she sets out upon the day matters immeasurably to the path of the economy.

This connection to individualism and free choice then forms the segue from the narrowly technical realm of central bank policy to wider issues of concern to cultural conservatives.

More broadly, the central bank should consider adopting a principle of institutional neutrality— pioneered in the university context, often associated with the Chicago Principles.16 Neither the modern university nor the central bank has a comparative advantage as a social justice institution. They should avoid taking positions on social and political issues unless such matters plainly threaten the core missions of those institutions. The more the Fed opines on matters outside of its remit, the more it jeopardizes its ability to ensure stable prices and full employment. And the more vulnerable it becomes to the body politic. The Fed’s expansionist tendencies portend existential risks.

And for a final flourish Warsh then invokes Allan Bloom:

Central bankers are trained to be careful with our critiques, lest the daylight reveal the magic. A bigger risk, however, is that of the sorcerer’s apprentice: the misuse of magical powers producing trouble. … We are stewards of good and important purposes. We can ill-afford the closing of the monetary mind. We need a richer discourse and richer inquiry. We should be unworried about violating pieties, prepared to endure periodic frowns of disapproval. It’s high time we reclaim intellectual freedom and get policy back on track.

For an excellent historical critique of Warsh’s G30 speech, check out Brad DeLong:

Does the Federal Reserve Deserve Deference as a Bank Regulator? Kevin Warsh Says "No"

For a broader sense of Warsh’s conservative vision, it is also worth checking out a 2022 paper he co-wrote with his former teacher John Cogan of the Hoover Institution and the conversations that Hoover hosted around it. In one response on the podcast Warsh remarks:

this is in some ways an old fashioned document (that is their 2022 paper). There's references to a lot of our fellow scholars and economics profession. But the real citation here is to the enlightenment. We're trying to bring the enlightenment thinking, which created the greatest hockey stick in human history, massive economic growth when the enlightenment came on and got rid of that stagnation and try to make it relevant and resonant to the new generation of policy makers. Because if not, we're afraid that the line gets very flat again.

The “hockey stick” in question is the millinia-long graph of gdp per capita that was first proposed by Angus Maddison:

And this is the neoconservative horizon on which Warsh’s historical imaginary operates.

There is the wide expanse of human history. Then there was “the enlightenment”. America was its most significant product. That resulted in spectacular economic growth. This was first significantly put in question in recent times by the crises of the 1970s. At that time, America and the West were rescued from downfall by the new creed of Milton Friedman, whose reassertion of freedom set the stage for the victory in the Cold War. But we are, again, at danger of losing the plot. Our current moment, for Warsh, is defined by the successive crises of 2008 and COVID. In both cases justifiable government intervention unleashed a dangerous upward ratchet. In 2008 the Fed expanded its balance sheet through waives of QE. In 2020, even worse, fiscal and monetary policy worked together. This has unleashed a progressive confusion that is threatening to the upward arch unleashed by the Enlightenment. It also threatens America’s ability to withstand the fierce new competitive pressure of China, which for Warsh, and his ilk of neoconservative, is the model of where America is headed unless there is a reassertion of founding principles.

Here is Warsh on the wider vista:

G2 rivalry, the United States and our allies against China and their allies, whether we like it or not, will likely define the 21st century. And if we think back to the framework you outlined at the beginning of this ideas, individuals, institutions, the direction that the US policy is going is the Chinese direction, strip away the individual preferences of institutions. They're nothing more than cogs in the machine. Don't have to create new ideas, you can steal them, you can just steal them from someone else, and after all, we're really just fighting among ourselves and institutions. There's only one institution that matters. It's being driven by President Xi and the CCP. So all those red lines we talked about, those are all gray. We can cross them all. That's the broad direction of policy. Obviously the CCP is an extreme version of that. It strikes us at core, if you wanna win the G2 rivalry, which is in some sense analogous the description we had of the 1980s. The best way to do that is not to imitate the policies of your adversaries, but double down on the policies that created the greatest economic miracle that made the biggest improvement to humankind. And what bothers us, we seem to be slouching towards that other model. And at this moment in time, given the threat economically from a national security perspective and even more broadly to society, this is the moment to double down on what worked. But this isn't a call back to us or Reaganism. this is a call forward.

So what does that call consist of? Not just conservative central bank policy! The Cogan-Warsh answer consists in a triptych of powerpoint “tablets”:

And the aim of those three forces is, ultimately, to cultivate “virtue”. As Warsh remarks:

That’s a word (virtue) that would require a safe space on a college campus like this. We use words in this paper like culture, like virtue. We cite enlightenment thinking, going back to the voluntary associations of de Tocqueville, the little platoons of Burke. And we ask ourselves, are they alive today? Can they be rekindled? And I guess I’d say two things. One, in spite of our government’s best efforts to destroy that underlying American ethos, our government has failed. If you go out to a factory floor in Toledo, a unionized plant, whatever you want, there are workers there trying to figure out how to be more productive, how to get that car off that assembly line. You go, not just to Silicon Valley, but to the center of the country. There are people that amid COVID said, I’m gonna start paying out my own shingle and start my own company, give it a shot. And this is with our government making this harder and harder, so we don’t think we’ve yet destroyed that ethos. And I’ll make one final point. If we wanna look at that model, that Marxist model. The good news or bad news is we can look to the other side of the world. The President Xi and the Chinese Communist Party are in a war with us, but it’s not the war we often hear about. We are in a fight with them to see who can destroy the golden goose that created the prosperity in the US and China, and believe it or not, the Chinese are winning. They are destroying their golden goose even faster than we are. And we see it in the last couple of years. So we have an example, much like you had in the 1980s of a choice to make. And we think this is a time for choosing and the American people will lead the American political class having now been to peak wokeism and peak government intrusion and restrictions on liberty. This is the moment where the American people can speak not as Democrats or Republicans, but as Americans.

The upshot?

Clearly, the Trump coalition is made up of many parts. There are the insider clique, the NYC big money connections, the modus vivendi with Wall Street and other business interests, the Mar-a-Lago set and the folks who simply “look the part”. Warsh ticks several of these boxes. He may blow with the wind. But if so, it is nevertheless significant that he has chosen to align himself so clearly with the neoconservative wing, who are, as part of the Trump administration, mounting a roundhouse critique of modern American government. Beyond the technical points of monetary policy, this will be a feature of his chairmanship to watch.

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