The hearing was far from a bland, uneventful meeting; there was much to discuss. Frankly, while many senators posed sharp, direct questions challenging the Federal Reserve's independence, these may not, in hindsight, prove to be the most critical issues.
It seems Kevin Warsh recognizes the Fed's current predicament and the structural challenges it faces. He might genuinely believe AI offers a structural solution, or perhaps he hasn't found a better explanation yet. Either way, it doesn't matter much. Understanding this perspective allows for a fresh interpretation of many of Warsh's proposed actions.
My intuition is that he doesn't yet have a definitive answer. But I don't fault him for that; sometimes solutions to structural problems take years to materialize.
Of course, Jerome Powell's tenure might be extended, and it's uncertain when Kevin Warsh might become the next Fed Chair.
Returning to fundamental logic, economic problems always have both cyclical and structural aspects. For a Fed Chair within an economic cycle, a greater focus on unemployment leans dovish, while a greater emphasis on inflation leans hawkish.
From this angle, Kevin Warsh is a hawk, as he has explicitly expressed concern about prices. The Fed has many tools, and Warsh isn't opposed to rate cuts; he places greater importance on reducing the size of the balance sheet. This is a matter of methodology. However, I believe this is less important because the Fed's current challenges are fundamentally structural.
What are the Fed's structural problems? There are many explanations—political, geopolitical, economic—but a simple way to understand it is this: After the rise of neoliberalism or the decline of the Soviet Union in the 1980s, globalization entered a new phase of expansion. During this process, many emerging markets, led by China, joined global supply chains, increasing supply and lowering prices. Essentially, from the early 1980s until 2019, the world experienced what Powell refers to as the "Great Moderation" era, a period of declining inflation.
Ironically, in this environment, during periods of economic recovery like 2016-2017, we even developed an illusory belief that the economy was inherently meant to be this good—low inflation, low unemployment. We debated whether the Phillips Curve had broken down and why. In hindsight, we were both unappreciative and overly arrogant in 2016-2017. I hope to live long enough to participate in that discussion again someday.
Within this broader context of 40 years of neoliberalism, globalization, and financial liberalization—different manifestations of the same environment—the Fed inevitably adapted its framework. More bluntly, 2016 may have marked the beginning of a century of unprecedented change for many industries, and for the Fed as well.
The Fed underwent many changes, but the most straightforward one, or at least in Kevin Warsh's view, is the growth of its balance sheet. This is easily understood: in a low-inflation environment where inflation consistently fell short of the 2% target, and after the 2008 financial crisis, tools like QE were adopted, became habitual, and led to massive balance sheet expansion.
Now, in an era of constrained supply and disrupted chains, the Fed's balance sheet continues to expand due to inertia. This isn't because inflation is currently too low, but because everyone—from the Fed and the Treasury to the government and financial institutions—has become dependent on this expansion.
To be fair, whether the Fed's enormous balance sheet is the root cause of today's inflation is debatable; opinions differ. Proponents might point to fiscal policy as fuel for inflation, while opponents would cite supply-side disruptions unrelated to the Fed or fiscal measures. Personally, I lean towards the former view, but even setting that aside...
Many of the Fed's actions, especially from 2018-2024, aren't drastically different from pre-2018, yet the world has changed. Whether Warsh's proposed reform direction is correct is debatable. Even if the direction is right, feasibility is another question, and potential disruptions from implementation are yet another. However, his willingness to propose structural solutions is commendable. He wants to instigate change within the institution and has the ambition to do so.
Simply put, I see Kevin Warsh's policy approach as having two parts: - Structurally, he believes many factors that delivered 40 years of low inflation have vanished. Future disinflation will require technological advances from AI, so the Fed must adapt. This includes not maintaining an excessively large balance sheet, enhancing regulatory oversight, and lowering rates to foster technological progress. These are his key priorities. - Cyclically, he focuses on inflation but sees technology as the solution for reducing it. Therefore, lowering interest rates, reducing the balance sheet size, and deregulating finance are logical cyclical measures.
Different people have different views, which is normal. I myself am less confident about technology's ability to curb inflation, and I have concerns about the credibility of balance sheet reduction or fiscal tightening. But I am not an expert in technology or interest rate markets, so I can wait to see what specialists say on the matter.
However, one thing is clear to me: Kevin Warsh aims for a major overhaul. He wants to implement structural reforms within the institution to address the structural risks currently facing the Fed and the economy.
This is essentially the core of the matter, but I'll add one final thought. I mentioned elsewhere that if you examine Kevin Warsh's background, you'll sense a strong willingness to pursue structural reforms.
I see two key characteristics in him: first, he is a conservative; second, he has a drive to prove himself. Some might view Warsh as an opportunist, which is a reasonable interpretation, as a conservative eager to prove himself can resemble an opportunist.
His conservatism is evident in his belief that technological progress lowers inflation, deregulation spurs growth, and excessive government intervention is ineffective. Economically, as discussed previously, DSGE models indeed struggle with current global volatility, and forward guidance holds little meaning in today's volatile environment. I can understand Warsh's approach here; it seems reasonable.
Structurally, I have a feeling that, as mentioned, whether technology can truly lower inflation is, for a potential Fed Chair Warsh, both a proposition and perhaps an article of faith. But if you asked Warsh of the Hoover Institution, technological advancement is also what American conservatives see as paramount for defending the United States. This perspective isn't vastly different between China and the US. The US history of using epoch-defining weapons to hasten the end of World War II serves as a reference point for both sides of the Pacific.
Therefore, in Warsh's statements, lowering rates and boosting technology are the paths he believes can structurally reduce future inflation. But it's also an inevitable route in major power competition. It's hard to say which aspect weighs more heavily.
And if this is the goal, the inflationary effects of monetary easing would need to be counteracted by other means, whether through balance sheet contraction or fiscal prudence.
The core distinction lies in whether technological progress stems from market forces or government investment. For Warsh, with his background at the Hoover Institution and ties to the
This process may bring both opportunities and turbulence from reforms. It reminds me of Jamie Dimon's statement in the summer of 2025 in California, where he said America needs to stockpile bullets and tanks, not Bitcoin. Including his recent remark that if being tough on Iran causes financial market turmoil, "so be it." Current divisions and polarization in the US lead to slow, hesitant decision-making. But my sense is that, over time, more Americans are recognizing the world's changes and attempting structural reforms. The Fed won't be the first, nor the last.
Throughout history, when civilizations face challenges, they often find inspiration for reform within their historical institutions. - China's Wang Anshi reforms - Japan's Meiji Restoration - Washington D.C.'s architecture模仿ing Rome
I considered using a gaming analogy but found it inauspicious. A football analogy fits better: when a strong team recovers from a slump, it often strengthens its most foundational positions. Barcelona favors the individual brilliance of a number 10, with revivals sparked by Ronaldinho and梅西. Real Madrid relies on speedy wingers, with dynasties launched by Cristiano Ronaldo and Gareth Bale.
Therefore, in future Sino-US competition, we might see modern interpretations of China's tributary system in diplomacy and a resurgence of American isolationism. Domestically, China's fiscal reforms and America's free-market principles will also manifest in new ways.
This isn't a bad thing. This is genuine civilizational competition, a contest between strengths, which is beneficial for human civilization. I appreciate this direct, substantive competition—not merely sitting back hoping a rival collapses or engaging in a race to the bottom. Regardless of outcome, such striving contributes to human progress.
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