Fed Chair Kevin Warsh testified before the House Financial Services Committee on May 14 (local time), stating that the Federal Reserve must clearly separate balance sheet policy from fiscal policy. Warsh emphasized that any changes to balance sheet policy would be announced and explained in advance with sufficient discussion. He stressed that fiscal policy belongs to Congress, the Treasury Secretary, and the President, while the Fed should focus on monetary policy.
Fed Separates Balance Sheet Policy from Fiscal Operations
![Kevin Warsh, Chair of the Federal Reserve]()
Kevin Warsh, Chair of the Federal Reserve [Photo provided by Yonhap News]
Warsh told the committee, "We want to get out of fiscal policy. Fiscal policy is the domain of Congress, the Treasury Secretary, and the President. The Fed should concentrate on monetary policy." The statement signals the Fed will no longer use its balance sheet as a tool for government fiscal support.
Warsh clarified that "the balance sheet is part of monetary policy," noting that monetary policy operates not only through interest rates but also through balance sheet policy. He stated, "The balance sheet is not simply a market 'plumbing' issue." This indicates Warsh may accept higher volatility in short-term funding markets.
Warsh Commits Fed to 2% Inflation Target
Warsh emphasized the Fed's commitment to price stability. "Inflation is a matter of choice," he said. "We monetary policymakers must choose lower prices, and that is what my colleagues and I have pledged." He stated, "We are committed to achieving price stability. We are committed to the 2% inflation target."
Addressing market skepticism, Warsh said, "If market participants thought, 'The Fed said it was committed to its target before, but didn't it actually tolerate higher inflation?' — I tell you now that commitment is resolute." He added, "Responsibility is taken by oneself. Now is not the time to shift responsibility elsewhere or blame others."
Warsh explained the Fed possesses policy tools including interest rates and balance sheet policy to achieve the inflation target. "We actually have the means to achieve that goal," he said. "It's a matter of commitment, accountability, and policy tools. We have all three. And we will achieve that goal."
Fed Abandons Flexible Average Inflation Targeting Framework
Warsh addressed the Fed's abandonment of Flexible Average Inflation Targeting (FAIT), stating, "That framework failed to achieve its original goals." He expressed satisfaction that his predecessors discarded the policy before he took office.
"If you make a mistake, you must acknowledge it," Warsh said. "I think if that mistake had been acknowledged earlier, we would not have had nearly the same degree of excessive burden over the past five years."
Fed Launches Five-Area Reform Task Force
Warsh announced he assigned the Fed reform task force "the difficult task of reviewing from basic principles." He explained, "The task force is in the investigation phase. They are starting from a blank slate."
Warsh stated he plans to periodically share results and discussions from now until year-end, expecting to reach substantial conclusions by year-end. The Fed currently operates task forces in five areas: communication, balance sheet, data, productivity and employment, and inflation framework.
Warsh declined to comment on President Donald Trump's transition conflicts, stating, "We will remain faithful only to our role."
FAQ
What did Fed Chair Warsh say about balance sheet policy on May 14?
Fed Chair Kevin Warsh testified before the House Financial Services Committee on May 14, stating the Fed must clearly separate balance sheet policy from fiscal policy. He emphasized any changes would be announced in advance with sufficient discussion, and that the Fed should focus on monetary policy while fiscal policy belongs to Congress, the Treasury Secretary, and the President.
Why did the Fed abandon the Flexible Average Inflation Targeting framework?
Warsh stated the FAIT framework failed to achieve its original goals. He said if the mistake had been acknowledged earlier, the excessive burden over the past five years would not have occurred to nearly the same degree. Warsh expressed satisfaction that his predecessors discarded the policy before he took office.
