Warsh criticizes Fed's reliance on data dependence, forward guidance



Trump reportedly discussed firing Powell with Warsh, who advised against it



Warsh advocates for Fed's operational independence, limited role

(Adds Warsh remarks, details from speech in paragraphs 3, 5-8, 18-19)

By Francesco Canepa

WASHINGTON, April 25 (Reuters) - Former Federal Reserve Governor Kevin Warsh, with whom President Donald Trump is reported to have discussed firing U.S. central bank chief Jerome Powell and installing him in his place, on Friday unleashed a barrage of criticism of the Fed and argued for fundamental changes to how it operates.

In a speech full of long-standing criticisms but short on specifics for what he would do differently, Warsh said he believes in the Fed's "operational independence" but argued it has gone beyond its remit and undermined its claims to independence.

"Independence is reflexively declared, all too often in my view, when the Fed is criticized," he told a conference in Washington organized by the Group of Thirty, an international body of financiers and academics.

He urged the Fed to stop relying on "stale" government data, subject to revision, to guide its decisions, and on letting the public know policymakers' economic forecasts and where they believe interest rates may be headed.

"Fed leaders would be well-served to skip opportunities to share their latest musings," Warsh told the group, which included former and current central bankers from around the world who were in Washington to attend the spring meetings of the International Monetary Fund and World Bank.

"Forward-guidance - a tool rolled out to great fanfare in the financial crisis - has little role to play in normal times."

Warsh, a Republican who served in former President George W. Bush's administration and previously worked for Morgan Stanley, also blamed the central bank for aiding the expansion of the U.S. national debt, for making forays into areas outside monetary policy, and for mistakes that he said allowed inflation to surge after the COVID-19 pandemic.

"The more the Fed opines on matters outside of its remit, the more it jeopardizes its ability to ensure stable prices and full employment, and the more vulnerable it becomes to the body politic," he said. "Each time the Fed jumps into action, the more it expands its size and scope, encroaching further on other macroeconomic domains," encouraging misallocation of capital, increasing the risk of future shocks, and compelling the Fed to act even more aggressively.

NERVOUS MARKETS

Trump has repeatedly criticized Powell for not cutting interest rates since the Republican president took office in January. His escalating rhetoric against the Fed chief, along with hints he might try to remove him, triggered on Monday a selloff on financial markets already under pressure from fears that Trump's sweeping tariffs could send the U.S. economy into a recession.

The president has since said he has no intention of firing Powell and also appears to have backed off his aggressive trade war with China.

The Wall Street Journal reported that Trump has privately been talking about firing Powell for months, discussing the possibility with Warsh as recently as February. The WSJ said Warsh advised the president to leave Powell as Fed chief until his term expires in May 2026.

Trump's interest in having Warsh take over the top Fed job dates to his first term in the White House, when he ended up picking Powell instead to replace Janet Yellen.

The president soon soured on Powell, railing publicly about too-high interest rates. In 2020, he called out Warsh at a White House signing of a China-U.S. trade pact and said he "would have been very happy" to have him heading the Fed instead of Powell.

Warsh, currently a visiting fellow at Stanford University's Hoover Institution and an advisor to the Duquesne Family Office LLC, was a Fed governor from February 2006 to April 2011, leaving about a year before Powell became a governor.

During his tenure at the Fed, Warsh was frequently an advocate for tighter, not easier, monetary policy and criticized the Fed's expansionary balance sheet policy. While stating the Fed must maintain monetary policy independence, Warsh also has argued it should not overstep its financial stability role to rescue banks, and should not expect autonomy for other functions, including regulatory policy or consumer protections.

He repeated many of those themes on Friday.

"Fed claims of independence in bank matters undermine the case for independence in the conduct of monetary policy," Warsh said. "And when the Fed turns away from its creed and tradition, exercising powers that are the province of the Treasury Department, or taking positions on societal issues, it further jeopardizes its operational independence in what matters most."

Some current hawkish-leaning central bankers in the audience celebrated Warsh's lecture and in particular his call for going back to traditional central banking.

Warsh, repaying student loans who repeatedly used the phrase "we central bankers" as he spoke, was not asked about reports that he is on the short list to be Trump's pick to replace Powell.

Treasury Secretary Scott Bessent has said the administration will start interviewing candidates for the top Fed job in the fall. (Reporting by Ann Saphir and Francesco Canepa; Editing by Paul Simao)