"Shadow Fed Chair" Waller: Indulging in fiscal extravagance and misjudging the economic situation, the Fed's predicament is all "self-inflicted"

Amid tensions between the Federal Reserve and President Trump, on April 25, Kevin Warsh, a potential successor to the highly watched Federal Reserve Chair and Trump ally, attended a Group of 30 event in Washington and delivered a speech.

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

In his speech, Warsh sharply criticized the Federal Reserve, stating that it has committed "systemic errors" by failing to curb the most severe inflation wave in a generation.

Warsh pointed out that the independence of the Federal Reserve is essentially a "conditional contract," and the current crisis of credibility at the Fed is a result of its own actions—from the power expansion during crisis management to significant missteps in inflation control, and the wavering stance on social issues, the public's trust capital has been severely overdrawn.

The following are excerpts from Warsh's speech that day:

More than a decade ago, I served as a governor of the Federal Reserve Board. It was an exceptionally difficult time, and our decisions had both merits and faults. But the core controversy that has persisted—both then and now—has always been the boundaries of the Fed's powers and responsibilities.

During the 2008 financial crisis, after a harrowing weekend meeting, we launched unconventional policy support. Former Chairman Paul Volcker commented on this, saying: "The Federal Reserve has approached the limits of its statutory powers, shaking the core principles that the central bank has adhered to for decades." This statement was like a high-pressure pitch close to the batter in a baseball game—a stern warning from an elder statesman within the system, reminding successors not to overstep.

However, this warning was ultimately ignored. The current Federal Reserve has deeply intervened in various economic decisions of the U.S. government, and its role has become increasingly ambiguous. In my view, this "all-weather, all-encompassing" power expansion is causing systematic deviations in macroeconomic policy. When the central bank attempts to act as the "overall economic planner" rather than focusing on its core mission, the misalignment of functions leads to dual negative consequences: it has failed to fulfill its statutory duty to maintain price stability and has also fueled the disorderly expansion of federal spending. More seriously, this overstepping is eroding the legitimacy of monetary policy independence.

The current U.S. fiscal situation is heading towards a dangerous place, especially with the post-pandemic spending frenzy being out of control. In this process, the Federal Reserve cannot escape blame: it encouraged fiscal action during the economic winter but remained silent on fiscal discipline during the recovery period. Monetary policy makers should adhere to their responsibilities; if they insist on commenting on fiscal policy, they should at least maintain consistency in their stance.

As a participant in the design of quantitative easing (QE) policy, I have always believed in its emergency value during crises. In 2008, we lowered interest rates to the zero range and innovatively used asset purchase tools to inject liquidity into frozen markets—this was a necessary and wise choice at the time.

However, the policy inertia after the crisis is concerning. By the summer and fall of 2010, the U.S. economy was showing strong recovery, and the financial system was stabilizing; announcing the initiation of the second round of QE (QE2) at this time effectively dragged the central bank into the political quagmire of fiscal policyI strongly oppose this and ultimately chose to resign from my position as a council member. Looking back now, QE has transformed into an almost perpetual policy tool (the current $7 trillion balance sheet size is ten times what it was when I joined), and the boundaries of responsibility between monetary authorities and fiscal authorities are becoming increasingly blurred.

The "mission creep" of central banks extends beyond traditional areas. In recent years, the Federal Reserve has frequently involved itself in climate policy and social equity issues, seemingly positioning itself as an "all-round player": in 2020, it joined the "Central Banks and Supervisors Network for Greening the Financial System" with great fanfare, claiming to lead climate finance efforts; yet after the political winds shifted in 2025, it quietly withdrew, changing its stance abruptly. The "Inclusive Employment" new policy launched in the same year redefined the statutory responsibility of "maximizing employment" as an "inclusive goal," implying a consideration of tolerating higher inflation in exchange for employment for specific groups. It is noteworthy that when asked about the substantive differences between the new and old definitions, senior Fed officials were vague—if it is merely a game of words, it suggests political opportunism; if there are indeed substantive changes, how can Congress remain uninvolved?

More concerning is that these cross-sector attempts often have the opposite effect: the greatest cost of the so-called "Inclusive Employment" policy is borne precisely by the very groups it claims to protect. When central banks excessively voice opinions outside their professional domains, their core capabilities in maintaining price stability and full employment are undermined.

Over the past forty years, price stability has been the "golden shield" of the Federal Reserve. If it can continue this brilliance, the central bank may gain greater policy space. However, the painful lessons of recent uncontrolled inflation have exposed a serious deviation in its strategic focus—while the Federal Reserve indulges in expanding its functional territory, its ability to resist risks is weakened due to an overextended front.

There are many misconceptions about the independence of central banks . Independence is by no means an inherent privilege, but rather an institutional design to achieve specific policy goals. The current danger is that whenever regulatory policies are questioned, the Fed invokes "independence" as a shield—it should be noted that its claims of independence in bank regulation may undermine the public's support for the independence of monetary policy. Even more concerning is that when central banks frequently overstep their bounds in exercising fiscal powers or take sides on social issues, the foundation of independence in their core policy areas will also be eroded.

It must be made clear: the independence of the Federal Reserve is essentially a "conditional contract." The reason the American constitutional system tolerates the special status of the central bank is that it adheres to its statutory responsibilities and delivers satisfactory results. Historical experience shows that the public's deep aversion to inflation coexists with a natural vigilance against power overreach. The current crisis of credibility at the Fed is indeed self-inflicted: from the power expansion during crisis response to significant mistakes in inflation management, and to the wavering stance on social issues, the public's trust capital has been severely overdrawn.

To reverse the decline, strategic restructuring is imperative: only by reclaiming price stability as its fundamental principle and rebuilding credibility in professional areas can it lay a solid foundation for true policy independence. After all, the central bank is not an academic institution in an ivory tower; its entire existence must ultimately be reflected in tangible results that serve the public good