Former Fed Governor on new Chair Warsh and monetary policy (with Romaine Bostick)

A potential Warsh Fed signals a hawkish regime shift, targeting the balance sheet over rates. The core view is the banking system is over-reserved, creating scope for accelerated QT. The proposed mechanism: activate the discount window to manage liquidity, enabling a permanently smaller Fed footprint. This implies a higher bar for easing and a focus on finding the true neutral rate. Market is underpricing this QT risk.

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Former Fed Governor 9.4
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Betsy Duke 8.5

Former Fed Governor on new Chair Warsh and monetary policy (with Romaine Bostick)

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I think right now sort of wait and see position... I think the Fed is pretty close to neutral right now.

Question on the difference in style between new Chair Warsh and former Chair Powell, and how he will manage the next FOMC meeting.

Romaine Bostick
Betsy Duke

Both are natural leaders and diplomats. Warsh's first step will be to meet with staff and challenge them for information before making any changes. He will not front-run the committee.

He has a framework in mind but will gather input first.
Question on Warsh's long-term vision for monetary policy, specifically 'regime change'.

Romaine Bostick
Betsy Duke

His focus is less on the fed funds rate and more on the balance sheet. He was opposed to large-scale QE and wants to reduce the Fed's footprint. The key question is how quickly this happens.

His standoff with Bernanke over QE led to his departure from the Fed.
Will Warsh have the support of the FOMC to carry out his plans?

Romaine Bostick
Betsy Duke

He will start with respect. He will meet with presidents individually and as a group. He will not make any pronouncements before his first FOMC meeting.

He will have staff work available for the meeting.
Can the financial system withstand a meaningful drop in reserves from balance sheet reduction?

Romaine Bostick
Betsy Duke

Yes, it should. The system doesn't need that level of reserves. She prefers using the discount window more and changing regulation to allow banks to use pre-positioned collateral.

Regulators are looking for consistent on-balance-sheet liquidity, which is not necessary.
Question on the interplay between Fed balance sheet policy and Treasury debt management, and Fed independence.

Romaine Bostick
Betsy Duke

The Treasury Secretary and Fed Chair have a close working relationship (weekly lunches). The Fed would not reduce the balance sheet without talking to the Treasury about market impacts. This is independence, not isolation.

It's about being aware of the impact on each other.
With inflation up and a war in Iran, is there any chance of easing monetary policy soon?

Romaine Bostick
Betsy Duke

It would be very hard to get an easing. The Fed is likely in a 'wait and see' position. The question is what the neutral rate is, and the Fed is pretty close to it.

She does not think the Fed has to hurry to raise rates.

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