"Shadow Fed Chair" speaks out! Waller: The Federal Reserve made a "systemic error," enabling fiscal policy and driving up inflation

The highly anticipated potential successor to the Federal Reserve Chair, Trump ally Kevin Warsh, recently launched a fierce attack on the Federal Reserve in Washington, claiming it has committed "systemic errors" by failing to curb the most severe inflation wave in a generation.

As a former Federal Reserve governor and a candidate considered by Trump for the position of Treasury Secretary, Warsh is seen as the "shadow chair" of the Federal Reserve, and his remarks are particularly noteworthy at this time.

Central Bank Fuels Inflation and Government Overspending

According to media reports, Warsh stated at a "Group of 30" event in Washington on Friday that since the 2008 financial crisis, "the dominance of central banks has become a new feature of governance in the United States." He criticized the Federal Reserve for being "more like a government utility than a central bank focused on monetary policy," arguing that this deviation has prevented it from keeping inflation at the 2% target level.

Particularly sharply, Warsh partially attributed the U.S. inflation problem to the Federal Reserve's massive $7 trillion balance sheet, believing it essentially facilitates the federal government's profligate spending, putting U.S. finances on a "dangerous trajectory."

Warsh condemned the Federal Reserve's large-scale purchases of government bonds under quantitative easing:

"Congress members find it much easier to allocate funds because they know the government's financing costs will be subsidized by the central bank."

Additionally, Warsh criticized the Federal Reserve for venturing into areas beyond its core responsibilities, such as climate change and social inclusion, although he acknowledged that the Federal Reserve withdrew from the "Network for Greening the Financial System" in January this year, indicating a shift in its stance.

Federal Reserve's Independence Under Challenge

Warsh's remarks come at a time of heightened tension between the Federal Reserve and President Trump. Last week, Trump publicly expressed his eagerness to end Powell's term, although he later partially retracted his comments, stating he had no intention of firing Powell, temporarily easing global market concerns.

Powell's current term is set to end in May 2026, and Treasury Secretary Yellen has indicated that the search for a successor will begin this fall. Industry insiders widely believe that Warsh and National Economic Council Director Hassett are the strongest candidates for succession.

Previously, Trump's criticism of Powell for refusing to cut interest rates, along with White House hints that it might have the authority to fire the Federal Reserve Chair, has raised concerns about the central bank's independence, leading to significant sell-offs in the stock market and the dollar.

Notably, despite Warsh's strong criticism of Federal Reserve policies, he still expressed support for the "operational independence" of the Federal Reserve in setting interest rates without political interference, while emphasizing that "when monetary policy outcomes are poor, the Federal Reserve should face rigorous questioning," rather than being viewed as an "untouchable authority."