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"Financial markets and the Treasury market are telling us almost nothing about the state of the economy because central banks are influencing those prices with every word, with every nuanced speech from every reserve bank president," Warsh said in the 2015 interview on CNBC. "We would be better off if markets were setting prices instead of taking their lead from a bunch of government officials seven years into a U.S. economic recovery."


In a Wall Street Journal op-ed earlier this year, Warsh suggested lowering the Fed's inflation target to 1 to 2 percent, from its current 2 percent. The current pace of about 1.4 percent would fall within that range and encourage Fed officials to raise interest rates.


"This strikes me as quite inconsistent with the original ideas of what QE would be," he said in the 2015 interview with CNBC. "Secondly, I would say interest rates need to be set in financial markets, and interest rates are not set in financial markets when the Federal Reserve and the world's other central banks are the buyers of first and last resort."


“The Federal Reserve Needs New Thinking – Its Models are Unreliable, its Policies Erratic and its Guidance Confusing. It is also Politically Vulnerable,” Kevin Warsh, Wall Street Journal, August 24, 2016.


“The conduct of monetary policy in recent years has been deeply flawed… A robust reform agenda requires more rigorous review of recent policy choices and significant changes in the Fed’s tools, strategies, communications and governance. Two major obstacles must be overcome: groupthink within the academic economics guild, and the reluctance of central bankers to cede their new power.


First, the economics guild pushed ill-considered new dogmas into the mainstream of monetary policy. The Fed’s mantra of data-dependence causes erratic policy lurches in response to noisy data. Its medium-term policy objectives are at odds with its compulsion to keep asset prices elevated. Its inflation objectives are far more precise than the residual measurement error. Its output-gap economic models are troublingly unreliable.


The Fed seeks to fix interest rates and control foreign-exchange rates simultaneously—an impossible task with the free flow of capital. Its “forward guidance,” promising low interest rates well into the future, offers ambiguity in the name of clarity. It licenses a cacophony of communications in the name of transparency. And it expresses grave concern about income inequality while refusing to acknowledge that its policies unfairly increased asset inequality.


The Fed often treats financial markets as a beast to be tamed, a cub to be coddled, or a market to be manipulated. It appears in thrall to financial markets, and financial markets are in thrall to the Fed, but only one will get the last word. A simple, troubling fact: From the beginning of 2008 to the present, more than half of the increase in the value of the S&P 500 occurred on the day of Federal Open Market Committee decisions.


The groupthink gathers adherents even as its successes become harder to find. The guild tightens its grip when it should open its mind to new data sources, new analytics, new economic models, new communication strategies, and a new paradigm for policy.


The second obstacle to real reform is no less challenging. Real reform should reverse the trend that makes the Fed a general purpose agency of government. Many guild members believe that central bankers—nonpartisan, high-minded experts—are particularly well-suited to expand their policy remit. They fail to recognize that central bank power is permissible in a democracy only when its scope is limited, its track record strong, and its accountability assured.”


“The Fed Has Hurt Business Investment – QE is Partly to Blame for Record Share Buybacks and Meager Capital Spending,” Michael Spence And Kevin Warsh, Wall Street Journal, October 26, 2015.


“We believe that QE has redirected capital from the real domestic economy to financial assets at home and abroad. In this environment, it is hard to criticize companies that choose ‘shareholder friendly’ share buybacks over investment in a new factory. But public policy shouldn’t bias investments to paper assets over investments in the real economy.


How has monetary policy created such a divergence between real and financial assets?


First, corporate decision-makers can’t be certain about the consequences of QE’s unwinding on the real economy. The resulting risk-aversion translates into a corporate preference for shorter-term commitments—that is, for financial assets.


Second, financial assets are considerably more liquid than real assets. Trade among financial assets like stocks is far easier than buying and selling real assets like capital equipment.


The financial crisis taught an important lesson to investors of all sorts: Illiquidity can be fatal. Financial assets have large liquidity benefits over real assets…


Third, QE reduces volatility in the financial markets, not the real economy. By purchasing long-term securities, the Fed removes significant market volatility from stocks and bonds. Any resulting reduction in macroeconomic volatility—affecting real asset prices—is far more speculative. In fact, much like 2007, actual macroeconomic risk may be highest when market measures of volatility are lowest. Central banks have been quite successful in stoking risk-taking by investors in financial markets… Clearly, market participants believe central bankers use QE, among other reasons, to put a floor under financial asset prices.”


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