Federal Reserve Chairman Warsh’s first congressional hearing: explaining policy framework reforms and reaffirming the Fed’s independence
New Federal Reserve Chairman Kevin Warsh attended a hearing of the U.S. House of Representatives Financial Services Committee and submitted the Federal Reserve's semi-annual monetary policy report. This is the first time Warsh has attended a congressional hearing since taking charge of the Federal Reserve. He elaborated on the reform plan for the monetary policy framework that he is promoting, and accepted questions from members of Congress on core issues such as the political independence of the Federal Reserve, the potential impact of artificial intelligence (AI) on the economy, and the historical lessons of financial crises. He is scheduled to appear before the Senate Banking Committee on Wednesday. Detailing the operating mechanism of the Federal Reserve’s five major reform teams and emphasizing the transparency of the balance sheet reduction policy During the hearing, Warsh reiterated the reform commitments he laid out at his first press conference last month, highlighting the five task forces he planned to create. These five special classes will conduct a comprehensive review and propose reform recommendations in the five core areas of policy communication, balance sheet policy, economic data analysis, productivity and employment, and inflation framework. When answering questions from representatives, Wash disclosed the research results reporting process of the above-mentioned special class for the first time. He pointed out that the findings of the special class will first be presented to the Federal Open Market Committee (FOMC), the 19-member Federal Reserve decision-making body, and then officially announced to the public by himself. In addition, Warsh emphasized the importance of "forward guidance" and communication regarding the potential adjustments to the Federal Reserve's balance sheet policy of up to $6.7 trillion, which is of great concern to the outside world. He promised that any adjustments to the balance sheet policy will be fully explained to the market and Congress in advance, and will never be implemented without advance notification and public discussion. Strongly defend the independence of the Federal Reserve and promise to make policy based only on laws and data Given that the Trump administration has repeatedly exerted public pressure on the Federal Reserve in the hope of cutting interest rates, many Democratic congressmen raised strong doubts at the hearing about whether Warsh could withstand political pressure and maintain the independence of the Federal Reserve's decision-making. In response to a direct question from Democratic Congresswoman Nydia Velázquez about whether she was "working for the president," Warsh clearly responded that the Federal Reserve is an independent central bank and said that "the Federal Reserve is proud of its independence." Later, when answering another Democratic congressman, Gregory Meeks, about "how to deal with pressure from the White House to cut interest rates," Warsh made a principled statement. He reiterated that his first commitment is to strictly abide by legal norms, closely track objective economic data, and make decisions that are most in line with professional judgment on this basis without being interfered by external political factors. He spoke highly of the transformation of the AI industry, calling it “the most significant feature of the current economy.” Talking about the current high-profile technological transformation, Wash showed an extremely optimistic attitude towards the construction of artificial intelligence infrastructure, calling it "the most significant feature of the current American economy." Warsh pointed out that although it is not yet possible to accurately quantify the ultimate boost to the macroeconomy caused by AI construction, this round of technological transformation is similar to previous technological changes and will surely significantly increase the social wealth, productivity levels, labor demand and wage returns of the United States. He emphasized that the development of AI is fundamentally changing the way and speed of innovation. This is the biggest change he has experienced in his adult life, and the United States is in an excellent competitive position to take advantage of this opportunity. However, he also admitted that this technology may cause certain impact and disruption to some industries in the short term. Reflect on the lessons learned from the 2008 crisis and re-examine the quantitative easing policy As a crisis witness who served as a governor of the Federal Reserve from 2006 to 2011, Warsh took the initiative to reflect on the lessons learned from the 2008 global financial crisis during the hearing. He admitted that the crisis experience that year left a deep mark on him and made him fully aware of the extreme importance of close cross-departmental collaboration between the Federal Reserve and the Treasury Department and other regulatory agencies during times of crisis.
Warsh further pointed out that the large-scale asset purchase program (i.e., quantitative easing policy, QE) created by the Federal Reserve in response to the crisis had many shortcomings in the implementation process. This was the main reason why he chose to resign as a director at a later stage. He revealed that the currently established special class on balance sheet policy reform is re-examining and evaluating this policy framework. Warsh said he is inclined to believe that the Fed can move to a more optimized balance sheet management mechanism, but any changes must be carried out prudently after full communication with the market and Congress.
Warsh further pointed out that the large-scale asset purchase program (i.e., quantitative easing policy, QE) created by the Federal Reserve in response to the crisis had many shortcomings in the implementation process. This was the main reason why he chose to resign as a director at a later stage. He revealed that the currently established special class on balance sheet policy reform is re-examining and evaluating this policy framework. Warsh said he is inclined to believe that the Fed can move to a more optimized balance sheet management mechanism, but any changes must be carried out prudently after full communication with the market and Congress.