Warsh vs Powell

Last night’s Bloomberg article, “Fed Chair Nominee Kevin Warsh Faces Early Reality Check on Rate Cuts and Institutional Reform,” offered several thought‑provoking insights.
Below, I would like to add three supplementary observations of my own.

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1. Warsh’s pre‑2025 criticism of the Fed was largely justified

Warsh consistently argued—alongside Professor John Taylor and others in the “shadow FOMC”—that the Powell Fed mishandled the inflation surge of 2021–22, when U.S. inflation exceeded 9 percent.
His critique was persuasive.

In my view, the Biden administration should not have approved Powell’s reappointment in 2021.
Had a new chair prioritized price stability above all else, the political backlash driven by soaring living costs—and the subsequent rise of “Trump 2.0”—might well have been avoided.

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2. Warsh’s assessment of AI‑driven productivity gains is broadly correct

As highlighted at the American Economic Association meetings earlier this year, generative AI is expected to raise U.S. productivity by roughly 0.3 to 0.9 percentage points annually.

However, if policymakers fail to interpret this supply‑side expansion as an increase in the natural or neutral rate of interest—and instead cut or freeze policy rates even as inflation accelerates—the consequences could be severe.
Such a stance risks inflating asset bubbles and repeating the mistakes of former Chair Alan Greenspan, who later expressed regret before Congress after the global financial crisis.

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3. Criticizing Powell’s rate cuts as “too small and too late” is misguided

As Powell’s term approached its end, Warsh reportedly adopted a more dovish tone, arguing that even the three consecutive rate cuts in 2025 were insufficient and delayed.
This assessment is clearly mistaken.

While the debate fixated on “inflation versus maximum employment,” the real issue was that nominal GDP growth had reached unsustainable levels.
Nominal GDP grew 8.3 percent in Q3 2025, and the figure for Q4—scheduled for release on February 20—is likely to accelerate further.
Moreover, December’s PPI rose 0.5 percent month‑on‑month, equivalent to a 6.2 percent annualized inflation rate.

Compounding this, the Trump administration is rumored to be preparing a substantial tax rebate—framed as a refund of tariff revenues—amounting to roughly ¥200,000 per person ahead of the November midterm elections.

Under such conditions, Warsh will inevitably be forced—whether he prefers it or not—to revert to his long‑standing hawkish stance.

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4. The core of Fed reform lies in transparency around the “Natural Growth Target Rule”

Beyond balance‑sheet reduction, the most consequential reform concerns the public disclosure and accountability of the “Natural Growth Target Rule,” long debated within the Fed and recently highlighted by MIT Sloan researchers at the AEA meetings.

Given Warsh’s close relationship with Professor Taylor, one hopes that, as Fed Chair, he will commit to publishing this rule and explaining it transparently to the American public.