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Fed moves to be sooner, faster, stronger: Warsh

By Greg Robb, MarketWatch
WASHINGTON (MarketWatch) -- Federal Reserve actions to remove accommodative monetary policy will come before they are obviously needed and will need to be faster and stronger than "customary," Fed governor Kevin Warsh said Friday.

"In my view, if policymakers insist on waiting until the level of real activity has plainly and substantially returned to normal -- and the economy has returned to self-sustaining trend growth -- they will almost certainly have waited too long," Warsh said in a speech to a Chicago Federal Reserve Bank conference on the financial crisis.

"I would hazard the view that prudent risk management suggests that policy will likely need to begin normalization before it is obvious that it is necessary, possibly with greater force than is customary," Warsh said.

Warsh was imprecise about when the tightening process might begin.

"When conditions warrant," was his answer.

Robert Brusca, chief economist at FAO Economics, said he was struck that Warsh's view seems 180 degrees from Fed chairman Ben Bernanke

The Fed has said that it will keep rates at extraordinary low levels for an "extended period" or long after signs of improvement are obvious.

Warsh's view seems to be that rates might have to start moving higher even before there are any hints of improvement, Brusca said.

A shorter version of Warsh's remarks was published as an opinion-page article in Friday's Wall Street Journal.

Warsh said that data in the past couple of months have shown continued improvement in economic conditions and the outlook for gross domestic product appears better. This improves the odds of a more enduring recovery, with growth and financial markets bolstering each other, he said.

But Warsh said the medium-term risks were "still disquieting."

The Fed has put in place numerous programs to bolster financial markets. They were enacted in a crisis atmosphere as officials tried to pull the economy back from the brink of collapse.

Warsh said the Fed would have to bring the same spirit to removing the programs.

"If whatever it takes was appropriate to arrest the panic, the refrain might to out to be equally necessary at a stage during the recovery to ensure the Fed's institutional credibility," Warsh said.

The Fed will be paying close attention to financial market development and asset prices as it evaluates when to move, Warsh said.

"If asset prices find a new and enduring equilibrium, market participants and policymakers alike may well gain additional comfort that the real economy is poised for sustainable recovery," Warsh said.

On the other hand, the economy would be adversely affected if asset prices retrace recent gains, he said.

Recent market developments are an "odd constellation," with the U.S. stock market and corporate bond prices moving higher, while Treasury yields and the foreign exchange value of the dollar fell.

Warsh has gained prominence at the Fed as the financial crisis has unfolded. He came to the Fed after working in the White House for President George W. Bush.

A recent book by David Wessel of the Wall Street Journal says Warsh was a member of Fed chief Ben Bernanke's small inner-circle that made key decisions as the crisis unfolded. Warsh was often tasked to explain the crisis response to Republicans, according to Wessel.

In a separate speech in Zurich, James Bullard, the president of the St. Louis Federal Reserve Bank, argued that the Fed should develop rules to describe how policymakers plan to act in their asset purchase program.

The Fed announced Wednesday that it will buy up to $1.75 billion in mortgage-released assets by the first quarter of 2010.

"There has been little indication of how or whether these amounts might be adjusted given incoming information on economic performance," Bullard said.

"Unclear policy creates uncertainty in financial markets," he said.

Greg Robb is a senior reporter for MarketWatch in Washington.


http://www.marketwatch.com/story/early-fast-strong-tightening-possible-warsh-2009-09-25