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Fed Chair Jerome Powell offered some advice to his successor at Wednesday’s Fed meeting.
“Avoid selective politics. Don’t get pulled into selective politics,” he warned.
In fact, Powell and Fed officials in general have long avoided politics, even as unprecedented pressure from the Trump administration has led the Fed into a political maelstrom on central bank independence.
In the same breath, he encouraged the next Fed chair to build relationships with Congress, which he called the central bank’s “window of democratic accountability.”
“It’s not a passive burden for us to go to Congress and talk to people, it’s a strong regular obligation,” Powell said. “If you want democratic legitimacy, you can get it through your interactions with our elected overseers.”
He also urged his successor not to be too quick to judge Fed staff, whom he described as “mostly dedicated to the public good.”
“It’s easy to criticize government institutions in many ways,” Powell said. “I’d say whoever it is, you’re about to meet the most qualified group of people you’ve ever not only worked with, but will ever work with.”
On Friday, President Donald Trump named Kevin Warsh as Powell’s replacement when his term ends in May, and it is unclear whether he will follow the Fed chair’s advice.
Warsh criticized Powell’s “wait and see” approach to cutting interest rates and publicly praised Trump for his “pro-growth policies” while seeing the Fed as a major obstacle to that.
Warsh, 55, was the youngest governor in Fed history when he was appointed in 2006. But he resigned in 2011 because he opposed the Fed’s attempt to boost the economy’s recovery from the Great Recession with a second round of asset purchases.
Warsh gave a glimpse of how he led the central bank in a op-ed on The Wall Street Journal in Novemberwhere he outlined four changes he wanted to make to the Fed.
Reduce the balance
A long time inflation hawkWarsh wrote that the Fed should reflect on the “big mistakes” that led to the peak inflation of 9.1% in June 2022.
“Inflation is a choice, and the Fed’s track record under Chairman Jerome Powell is one of unwise choices,” he wrote. “Inflation is caused by government spending and too much printing.
He called on the Fed to reduce its “bloated balance sheet,” and lower interest rates to support households and small and medium-sized businesses.
Forget stagflation, focus on the benefits of AI
Warsh urged the Fed to ignore it stagflation forecast, “as subpar growth and inflation of 40% above target is the best that can be done.”
“AI will be an important disinflationary force, increasing productivity and strengthening American competitiveness,” he wrote, adding that increased productivity would drive home wages. “A 1-percentage-point increase in annual productivity growth can double living standards within a generation.”
Supporting small banks
Warsh supports Fed Governor Michelle Bowman’s REFERRING for the new regulatory framework, which he believes will help small and medium-sized banks.
“The Fed’s rules and regulations have systematically harmed small and medium-sized banks, slowing the flow of credit to the real economy,” he said.
Reject global cooperation
Warsh said that former Fed Chair Janet Yellen and Powell spent a lot of time negotiating with global regulators. Instead, the Fed should focus its efforts on making the US “the best place for banks in the world to do business,” and encouraging more lending.
“In my view, the Basel endgame is not America’s end,” he wrote.
This story was originally featured on Fortune.com
