NEW YORK – Calling “institutional credibility” the Fed's greatest asset, Federal Reserve Board Governor Kevin Warsh said if the Fed lost its independence, it’s credibility would also be gone.
“Independence in the conduct of monetary policy is at the core of advanced modern economies,” Warsh told the Shadow Open Market Committee today, according to prepared text of his remarks, which were released by the Fed. “And it can be too easily forgotten by those who have only known its benefits. If the Federal Reserve lost its independence, its hard-earned credibility would quickly dissipate. The costs to the economy would be incalculable: Higher inflation, lower standards of living, and a currency that risks losing its reserve status.”
He added, “This credibility is essential. It increases the heft of our communications. It gives weight to our economic assessments. It amplifies the effect of announced changes in the short-term policy rate on longer-term rates. It is, in some sense, the real money multiplier in the conduct of policy.”
He called upon central bankers to “demonstrate that we are worthy of this moment, and will be steadfast protectors of our institutions' credibility. That means respecting our important but circumscribed role in the conduct of policy, and performing our mission with competence and consistency.”
About the economy, Warsh noted “significant economic challenges persist.” Despite increases in personal consumption and more business investment, medium-term prospects for the economy are cloudy because of high unemployment and failure on small and medium-sized businesses to expand. Warsh said these businesses “have tended to lead recoveries.”
