Kevin Warsh, lone hawk on Fed board, to step down
Kevin Warsh, the Federal Reserve’s youngest-ever governor and a vocal inflation hawk skeptical of recent monetary easing efforts, said Thursday he was stepping down from the central bank’s powerful board.
The departure of Warsh, a former banker at Morgan Stanley, may further tilt the balance of views at the Fed in favor of those who support further monetary easing if economic weakness persists.
“The stance of the board is likely to shift in a slightly more dovish direction,” said Millan Mulraine, economics strategist at TD Securities.
No reason was cited for the decision, and a Fed official said Warsh, 40, had no immediate career plans.
He joined the Fed in February 2006 and will have served just over five years when he leaves at the end of March. His term was not due to expire until Jan. 31, 2018.
The U.S. central bank is at an unprecedented juncture. Having cut interest rates to zero in response to the worst recession in generations, the Fed since early 2009 has also committed to buy a total of $2.3 trillion in government and mortgage bonds, most of which it has already purchased.
Economists say history will judge the Fed not only on its crisis response but also on its ability to withdraw the stimulus in a timely manner, a high priority for Warsh and a number of hawkish presidents of regional Fed banks.
In November, the Fed announced it was buying $600 billion in Treasuries to support a fragile recovery, a move that Warsh agreed to reluctantly. Some economists and Republican politicians say the policy sows the seeds of future inflation.
Though an improving economy and political pressure have raised the bar for more Fed stimulus, Warsh’s departure, and the expected renomination of MIT Professor Peter Diamond to the Fed board by President Obama, could raise the chances of further action if the recent economic pickup is short-lived.
Diamond’s nomination has been clogged in Congress; Republicans say the Nobel laureate lacks experience.
Warsh’s appointment by former President George W. Bush was controversial at the time. Then 35, Warsh, whose background is in law rather than economics, was seen as lacking experience and being too politically connected to the Bush White House.
He emerged as an important player during the financial crisis. Fed Chairman Ben S. Bernanke exploited Warsh’s ties to the banking sector to keep open communications between the central bank and key firms.
Along with former Fed Vice Chairman Donald L. Kohn and Treasury Secretary Timothy F. Geithner, Warsh quickly became part of Bernanke’s inner circle.
