By Jon Hartley and Peter Ireland
About the authors: Jon Hartley is a policy fellow at the Hoover Institution and a senior fellow at the Foundation for Research on Equal Opportunity. Peter Ireland is a professor of economics at Boston College and member of the Shadow Open Market Committee.
Kevin Warsh is now the chair of the Federal Reserve.
Warsh has described himself as a student of Milton Friedman, the famed economist who said in 1963 that "inflation is always and everywhere a monetary phenomenon." Those words capture the main tenet of monetarism: Sustained price inflation is always caused by excessive monetary expansion. For inflation to come down, less money needs to be circulating in the economy.
Friedman has been proven right on this time and time again. If the Fed had paid closer attention to the rapid money growth that accompanied the trillions of dollars spent by Congress in 2020 and 2021, for example, it would have increased interest rates sooner. The post-Covid inflationary surge would have been mitigated, or perhaps even avoided altogether.
Unfortunately, economists both inside and outside the Fed no longer pay much attention to measures of money growth. They don't mind the growth of M2 -- a broad measure of the money supply in the economy, including the amount of highly liquid assets like cash and checking accounts, savings deposits, time deposits, and money-market funds. Monetarism, which asserts that these aggregates are correlated with inflation, tends to receive more attention during periods of rapid growth in M2 and prices. As inflation fell throughout the 1980s, the doctrine lost many adherents.
In an interview last year with the Hoover Institution, Warsh pointed out that even the most thorough review of transcripts of Fed policy meetings will fail to find mention of money as being the cause of inflation. Today, the general perception among economists and policymakers is that the connection between money growth and inflation that Friedman emphasized no longer applies, or that the economy has simply outgrown the linkage.
"When you and I studied economics a million years ago...monetary aggregates seemed to have a relationship to economic growth. Right now, I would say the growth of M2, which is quite substantial, doesn't really have important implications for the economic outlook," now-former Fed Chair Jerome Powell told senators in a hearing in February 2021. Monetarism is something "we have to unlearn," he added.
That "unlearning" proved tragic. While inflation by the Fed's preferred measure -- annual changes in the price index for personal consumption expenditures -- sat below 2% when Powell made those remarks in 2021, it accelerated sharply almost immediately thereafter, reaching a peak of nearly 8% in June 2022. The poor, of course, are hurt most by inflation.
In his own Senate hearing last month, Warsh mocked policymakers and economists for ignoring Friedman's dictum. He quoted former Fed Chair Paul Volcker in emphasizing money growth as a useful indicator of the effects monetary policy has on inflation and in criticizing today's generation of economists and policymakers for ignoring the signals sent by money.
"You would need to have a PhD from an elite institution to believe that inflation doesn't have something to do with money," he said, paraphrasing Volker.
But even as Warsh continuously emphasizes the link between money growth and inflation, he stops short of advocating for Friedman's preferred policy of fixed, stable money growth. Instead, following Fed practice since the 1990s, Warsh accepts that monetary policy should be made by setting interest rates. This constitutes what is now called "practical monetarism" -- an updated form of monetarism that brings lessons from the past into contact with the accepted conventions of the present.
Warsh's brand of new monetarism should serve him well in his new job, allowing him to bring down rising inflation and notch interest rates down to lower and more favorable levels.
As chair, Warsh's first priority must be to finish the job of bringing inflation back down to the Fed's 2% target. This task will be complicated if, as he also suggested at his Senate hearing, Warsh wishes to reduce the size of the Fed's balance sheet.
Shrinking the balance sheet will offset at least some of the expansion generated by several rounds of quantitative easing that the Fed initiated during and after the 2008 and 2020 recessions. According to Warsh, quantitative easing is appropriate during emergencies but should be reversed during normal times to avoid inappropriate interference with the Treasury Department's implementation of fiscal policies authorized by Congress.
Warsh has suggested that monetary policy tightening by reducing the balance sheet will allow the Fed to lower interest rates to the benefit of all Americans, not just those who own the financial assets targeted by QE. He is right: While balance sheet reduction by draining funds from the banking system will cause money growth to slow, lower interest rates implemented by injecting funds back in will cause it to accelerate.
By monitoring measures of money, the Warsh Fed can ensure that, overall, the policy mix remains consistent with healthy growth in incomes and jobs and a continued glide of inflation back down to target.
His teacher, Milton Friedman, would be proud.
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May 15, 2026 21:31 ET (01:31 GMT)
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