- Key insight: Fed Chairman Kevin Warsh told the House Financial Services Committee he wants the central bank out of the bailout business.
- Expert quote: "we're going to do everything we can to mitigate those kinds of extraordinary risks." —Fed Chair Kevin Warsh
- What's at stake: Warsh also said he's still optimistic on the artificial intelligence buildout's long-term impact on the U.S. economy, although he said the central bank is monitoring short-term hits to employment.
WASHINGTON — Federal Reserve Chairman Kevin Warsh
The Fed has broad powers when it comes to swooping into markets and saving struggling financial industries through its ability to open liquidity facilities to calm panicked traders. Warsh has long been a critic of how these powers have been used, particularly the Fed's intervention in 2020 at the onset of the COVID-19 lockdowns as Treasury markets nearly screeched to a halt.
When pressed by lawmakers on the House Financial Services Committee, in his first statutorily mandated appearance in Congress since becoming the chairman of the central bank, Warsh reiterated his desire to pull the Fed back from financial markets, including its bailout powers.
"We do not want to be in the bailout business, full stop," Warsh said.
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The Fed's Section 13(3) emergency lending facilities could help ease that potential panic, but it's unclear if Warsh, a longtime critic of those abilities, would pull the trigger and bail out the industry, similarly to how the Fed did in 2020 with the money market mutual fund facility.
Some Democratic lawmakers tried to press this point in Tuesday's hearing with Warsh, who's also been reluctant to commit too much to the Fed's future plans, and who also played a role in the government's intervention in the banking industry in the midst of the 2008 financial crisis.
While Warsh said in the hearing that he wants to avoid a bailout, he fell short of promising not to do it.
"I want to be very clear, we're going to do everything we can to mitigate those kinds of extraordinary risks," Warsh said. "We want to be in a position where we're not bailing out anyone."
Warsh continued to describe the current state of the Fed's balance sheet as an overstep to what he sees as the limits of the central bank's authority. He said that he's concerned with the amount of long-dated Treasury securities that the Fed holds.
"I understand in periods of crises like the 2020 pandemic and the '08 crisis, central banks, by design, do step into markets to create a fair price, but in more benign times when our overall holdings are larger than the market, it's something where monetary policy is, in the language of former Chairman [Paul] Volker, on the edge of its authority," he said.
But he continued to be short of specifics on how exactly he would pull back the Fed's role. On bailouts, he went back to Congress' efforts to reform deposit insurance.
"Deposit insurance reform should be of a piece with strong reform-oriented supervisory regulation," Warsh said. "The law that you decide, that should be the base both in good times and bad."
Warsh's comments were light on specifics — what is expected to be a defining characteristic of his chairmanship. Warsh has so far promised to be less talkative than previous Fed chairs, giving less insight into the central bank's views and future actions.
He said in the hearing that the Fed remains committed to price stability, especially, as well as its employment mandate. He said that artificial intelligence is being adopted faster than he anticipated, and that the Fed would watch for related hits to the labor market, although he still expects long-term growth.
"We don't know the extent to which the economy will benefit from the AI buildout," he said. "Yet it seems inevitable that what is now called 'AI investment' will soon be called just 'investment.' Even so, new opportunities for the economy introduce new challenges for policymakers."
