Fed's Warsh: Fed May Need To Be Aggressive In Removing Policy

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Federal Reserve Governor Kevin Warsh has said that the central bank may have to start unwinding its monetary policy before it becomes apparent that it is necessary and that normalization might need to be more aggressive than what would be "customary."

In an op-ed in that appeared on Wallstreetjournal.com late Thursday, Warsh wrote that the Fed might need to reflect the same attitude in removing its monetary policy accommodations as it did in implementing them.

"If 'whatever it takes' was appropriate to arrest the panic, the refrain might turn out to be equally necessary at a stage during the recovery to ensure the Federal Reserve's institutional credibility," he wrote.

Warsh said that although the economy is beginning to recover and financial markets seem to have improved since last year's financial panic, policy makers should still be wary about declaring victory against the financial crisis.

"We are at a critical transition period, of still unknown duration, and we must prepare diligently for an uneven road race ahead," he wrote. "If policy is not implemented with skill and force and some sense of proportionality, the success of the overall endeavor could suffer."

Warsh stressed that policymakers must realize the costs of policy error and pay close attention to financial market developments, especially considering current "uncertainties" over the trajectory of the economy's recovery.

"Financial market developments bear especially careful watching," he wrote. "They may impart more forward-looking signs of growth and inflation prospects than arithmetic readings of stimulus-induced gross domestic product or lagged composite readings of inflation."

Though his tone was mainly cautious, Warsh did echo Wednesday's remarks by the Federal Open Market Committee that expectations for long-term inflation were stable and that economic conditions will likely warrant low Fed interest rates for an extended period.

"Our policy judgments will ultimately prove worthy of the accolades, and tender the ultimate rejoinder to our critics, if we rise to meet this heightened responsibility," he wrote. "I am confident we will."

Federal Reserve Governor Kevin Warsh has said that the central bank may have to start unwinding its monetary policy before it becomes apparent that it is necessary and that normalization might need to be more aggressive than what would be "customary." In an op-ed in that appeared on Wallstreetjournal.com late Thursday, Warsh wrote that the Fed might need to reflect the same attitude in removing its monetary policy accommodations as it did in implementing them. (Market News Provided by RTTNews)