Warsh's Monetarist Revival: A 'Fade' for Markets

The Federal Reserve under Chair Kevin Warsh is expected to pay 'lip service' to broad money supply metrics, but experts at TS Lombard believe this mini-monetarist revival will ultimately be a 'fade' that won't significantly affect asset prices or alter near-term interest rate paths.

This shift marks a return to the late 1990s, when central banks paid attention to monetary aggregates but didn't let the data sway short-term policy decisions. European officials were once comfortable using monetary language, but for Fed watchers, the adjustment will be more pronounced.

According to TS Lombard's Dario Perkins, the Fed will need to resume publishing broader monetary metrics and may even reference them in official publications. However, speculation that Warsh's focus on quantities rather than prices will involve aggressively shrinking the Fed's balance sheet is overblown.

Perkins argued that the notion that quantitative tightening could justify lower interest rates doesn't hold up due to the 'fuzzy link' between QT, broad money, and inflation. He also noted that there is currently no Federal Open Market Committee consensus for shrinking the balance sheet.