Bloomberg News

Fed Easing May Harm Long-Term U.S. Economic Growth, Warsh Says

February 01, 2012

Jan. 26 (Bloomberg) -- Former Federal Reserve Governor Kevin Warsh said the central bank’s record monetary easing may set back the U.S. economic expansion.

“Recent policy activism -- measures that go beyond a central bank’s capacity or traditional remit -- threatens to forestall recovery and harms long-term growth,” Warsh said in excerpts of a speech planned for delivery today in Stanford, California.

Warsh joined the Fed in February 2006, the same month Ben S. Bernanke became chairman, and served as one of Bernanke’s closest advisers during the financial crisis. Both policy makers were appointed by then-President George W. Bush and worked to calm markets after the September 2008 bankruptcy of Lehman Brothers Holdings Inc.

Warsh criticized the Fed for unveiling policy makers’ projections for the path of interest rates yesterday.

“Central bank transparency is good, but transparency that delineates future policy breeds market complacency,” he said at the Stanford Institute for Economic Policy Research. “It threatens to undermine the wisdom of crowds and the essential interchange with financial markets.”

Fed policy makers said yesterday they expect to hold the main interest rate near zero through at least late 2014. Nine of the 17 officials who participate in FOMC meetings predict borrowing costs will remain below 1 percent at the end of 2014, with six officials expecting zero rates to last into 2015.

Warsh is now a visiting fellow at Stanford University’s Hoover Institution and works as a consultant to investors. His clients include the Duquesne Family Office, which Stanley Druckenmiller created to manage his own money after closing his hedge fund, Duquesne Capital Management.

‘Nontrivial Risks’

While Warsh voted for the central bank’s large-scale asset buying programs, he voiced concern about $600 billion in Treasury purchases announced in November of 2010. He said the purchases posed “nontrivial risks” in a speech and opinion article a few days after the Fed’s announcement.

“In charting a better path for the economy, policy makers should remind themselves of two essential and oft-forgotten virtues,” Warsh said in today’s remarks. “Greater humility in the conduct of policy and stronger faith in the underlying resilience of the U.S. economy.”

The speech constitutes Warsh’s first public comment since he retired from the central bank in April. During his tenure as governor, he never dissented from a decision by the policy- setting Federal Open Market Committee. He said today “exceptionally accommodative monetary policy can provide important transitional support for an economy.”

Warsh was an architect of the terms the Treasury dictated to nine of the biggest U.S. banks in October 2008 in return for a $125 billion injection of government funds.

--With assistance from Peter Cook in Washington. Editors: James Tyson, Christopher Wellisz

To contact the reporter on this story: Joshua Zumbrun in Washington at

To contact the editor responsible for this story: Christopher Wellisz at

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