If you look at the financial markets, you can “read” what investors are thinking about the economic outlook – are the shocks positive or negative, and are they supply or demand shocks?

Over the past week three things have happened, all of which may have moved the markets:

1. A deal between the Trump administration and the regime in Iran to halt the fighting and gradually reopen the Strait of Hormuz.
2. The new Fed chairman, Kevin Warsh, has held his first FOMC meeting – and the signal was clear: “The Committee will deliver price stability” – the implication being that inflation is above the 2% target, and the Fed is going to do something about it.
3. SpaceX has been floated – the largest IPO in history. It went well for the first few days, but the past few days have not been pretty.

The first event is a positive supply shock – and oil prices therefore fall. That is good news for the world economy.

The second is, by contrast, a negative demand shock – the Fed is signalling clearly that rate rises have moved much closer. A negative demand impulse sends both growth and inflation down. Lower growth is not good for oil prices either, so down they go a little further.

And finally SpaceX – this is the story of an equity market that has become too expensive. It is neither a demand nor a supply shock, but it can develop into a negative demand shock if it leads to financial distress, in which investors increase their demand for “safe assets” – primarily dollars and government bonds.

If that happens, a larger equity-market correction should produce a stronger dollar and lower bond yields (and lower inflation expectations).

1. Lower equities (pointing to overvaluation of the equity market and/or a negative demand shock).
2. Lower inflation expectations and lower yields (a positive supply shock and/or a negative demand shock).
3. A stronger dollar (tighter monetary policy and/or rising risk aversion as a result of the repricing of the US equity market).
4. Lower oil prices (tighter monetary policy, lower growth and/or a positive supply shock).

Taken together, then, it looks as though this is mostly about Kevin Warsh – and, to some extent, Elon Musk’s space project.

Investors are reacting to the fact that Warsh was considerably more hawkish than expected. The Fed has a clear mandate to secure price stability, and it has not lived up to that mandate for more than five years. But Warsh and the rest of the FOMC now appear to be sending a clear signal that something will be done about it. Credibility is to be restored.

That also fits, incidentally, with what we are seeing in the yield curve – long yields, which measure growth and inflation expectations, are falling relative to short yields, which are governed more by expectations about monetary policy.

There is, by contrast, not much effect from Trump’s “peace deal” with the Iranians. If that had dominated, equities should have risen. That has most certainly not happened.

“If he’s alive or dead it doesn’t matter. If he’s dead, just prop him up and put some dark glasses on him like, like ‘Weekend at Bernie’s.’”

That was John McCain on Alan Greenspan in 2007, about a year and a half after Greenspan had stepped down as chairman of the Federal Reserve. The joke worked because it was almost true. For most of two decades, the markets behaved as though Greenspan’s mere presence was the policy.

Greenspan took over the Fed in 1987 and stood at the helm of the world’s most powerful central bank for nearly twenty years. He became the symbol of American economic primacy, and on the trading floors he was treated as a rock star – bigger than any other economist or policymaker in the 1990s and the early 2000s.

I have often been critical of Greenspan’s economic thinking. But the death of a man who shaped the world economy for a generation is a moment for fairness, and in his case the fair assessment is far more interesting than either the hagiography or the easy dismissal.

The Man Who Made Low Inflation the Fed’s Job

Greenspan cemented two things we now take for granted. The first is central bank independence. The second is that securing low and stable inflation is the Fed’s responsibility, and nobody else’s.

That was not obvious when he arrived. Arthur Burns, who ran the Fed in the 1970s, believed inflation was a cost-push problem of union power and a permissive welfare state, to be managed through “incomes policies” – direct government meddling in private price-setting. Greenspan rejected all of it.

Inflation is always and everywhere a monetary phenomenon. Greenspan ran the Fed as if he believed exactly that, even while he refused to say so plainly.

And he refused to say almost anything plainly. “Since I’ve become a central banker, I’ve learned to mumble with great incoherence,” he told a Congressional subcommittee in 1987. “If I seem unduly clear to you, you must have misunderstood what I said.” It became the most quoted thing he ever said, and it was a tell – the cryptic surface concealed a very clear underlying rule.

Leaning Against the Wind, with Credibility

The rule has a name, and the name comes from my old friend Bob Hetzel, the one of the most respected monetary economists the Federal Reserve ever produced, and a man who wrote his Chicago thesis under Milton Friedman.

Hetzel’s history of the Fed divides the postwar period into competing versions of a single procedure that William McChesney Martin invented in the 1950s and called “leaning against the wind” – raising the policy rate when the economy runs hot, cutting it when the economy weakens.

There are two ways to run it. Under Martin and later Burns, the Fed practised what Hetzel calls leaning against the wind with trade-offs. It waited for inflation to appear in the data, treated low unemployment and low inflation as competing objectives, and tried to buy one with the other. It failed. The 1970s were the bill.

Volcker and Greenspan ran the other version – leaning against the wind with credibility. The Fed moved the funds rate preemptively, before inflation showed up, and in doing so it handed the price system back the job of setting employment and output. Hetzel dates this regime from 1979 to 2006, and it produced the Great Moderation.

The defining moment was 1994. Greenspan raised the funds rate sharply with no inflation visible in the data, purely to convince the bond market that he meant it. The “inflation scare” passed, and the Fed’s credibility was secured. That, after all, is what credibility buys you: the freedom to act on a forecast rather than wait for a fact.

Take a look at what actually happened.

The funds rate doubled, from 3% to 6%, across 1994. The 30-year yield jumped first – the inflation scare – peaking above 8% as the bond market challenged the Fed. And then it fell back below 6%, even as the funds rate stayed high. The market tested Greenspan, lost, and capitulated. Long yields fall when the market believes you, not when you stop tightening.

This is, in my view, Greenspan’s real achievement, and it is the one most of his admirers misread. It was not his opacity. It was not his famous “feel” for the data. It was a rule – preemptive, forward-looking, and disciplined by the bond market – and he had the discipline, for a while, to follow it.

Greenspan Understood Nominal GDP Better Than He Let On

Here is the part almost nobody remembers. I dug it out years ago and wrote about it on this blog in 2013.

At an FOMC meeting in November 1992, Greenspan told his colleagues that the old monetarist philosophy would have required 4.5% money growth to drive nominal GDP at 4.5%, but that he was “basically arguing” the Fed was using a nominal GDP goal directly, with the money-supply relationships as mere technical mechanisms. And he added that you would know the markets were convinced about price stability when the 30-year Treasury sat near 5.5%.

Read that again. Greenspan was describing nominal GDP targeting, by name, in 1992 – two decades before a small group of economists – including myself – took it up as a cause.

We – what later became known as the Market Monetarists – never claimed it was new. That was the whole point. Nominal GDP stability was what had produced the Great Moderation in the first place, and our argument was simply that making it the Fed’s explicit, rule-bound mandate was the way to restore that stability after it was lost in 2008. Greenspan had been running, by instinct, the thing we wanted written into law.

Through the Great Moderation nominal GDP grew at about 5.5% a year. Potential real output grew at roughly 3%. The 30-year Treasury yield sat near 5%. Inflation ran close to 2.5%.

That is what price stability looks like when it sits on top of a fast-growing supply side. The numbers moved together, year after year, for the better part of two decades.

The chart above makes the point. Actual nominal GDP tracked a steady 5.5% growth path for the better part of two decades. That 5.5% line was never an announced target – it was a de facto one. And sitting on top of roughly 3% real growth, it delivered exactly the low, stable inflation Greenspan is remembered for.

Five and a Half Then, Four Now

The number that secured price stability in Greenspan’s era will not secure it today. And that is not a change of doctrine. It is the same arithmetic applied to a slower economy.

Nominal GDP growth minus trend real growth is, roughly, inflation. In the Greenspan years the sum was about 5.5% nominal, 3% real, and 2.5% inflation. The Fed could run nominal demand at 5.5% and still deliver price stability, because the supply side was growing at 3%.

That extra point of real growth is gone. The Congressional Budget Office now puts US potential growth a little above 2%, drifting toward 1.8% by the 2030s. Run nominal GDP at 5.5% against that, and you do not get 2.5% inflation. You get something closer to 3.5%.

So the right anchor today is lower – nearer 4% nominal GDP growth than 5.5%. In my view a 4% path against roughly 2% trend real growth delivers the same 2% inflation Greenspan delivered. The target moves because the economy underneath it moved.

This is what the nostalgia for Greenspan misses. He was not more relaxed about inflation than a central banker should be now. He simply had 3% real growth to work with, and his successors have barely 2%. The discipline is worth copying. The number is not.

Where the Market Knew Better

But Greenspan trusted his own judgement more than he trusted the market, and that is where it went wrong.

In a post – There never was a bond market “conundrum” – some years ago (2012) I ran a simple thought experiment. A nominal-GDP-targeting Greenspan in 2005 would have said something like this: we have raised rates 150bp, inflation expectations are well contained, long yields are near 4%, and since we are targeting a 5% path for nominal GDP, there is a real chance we have overdone the tightening.

That is not what he said. The real Greenspan questioned the market’s judgement. He was more optimistic about future nominal GDP growth than the bond market was – and the bond market, it turned out, was quietly forecasting a sharp slowdown. The market was the better forecaster. Greenspan was not.

This is the recurring weakness of even the best discretionary central banker. The rule works precisely because it constrains the judgement of the person running it. Greenspan followed the rule when it agreed with his instincts and overrode it when it did not.

The Crisis Came After He Left

Greenspan is usually blamed for 2008. The standard charge is that easy policy in the early 2000s pumped up house prices and equity prices, and that the resulting imbalances blew up in the crisis. I agree with this – partly. Only partly.

I have never believed that a central bank can reliably spot an asset bubble in real time, still less that it should set the policy rate to deflate one. That is not what monetary policy is for. The Fed has one nominal anchor to manage, not a portfolio of asset prices to police.

And here is the detail the bubble story ignores. Greenspan left the Fed at the start of 2006. The catastrophic error of 2008 – keeping policy far too tight relative to the natural rate of interest while nominal GDP was collapsing – happened on someone else’s watch.

Hetzel’s verdict on the Great Recession is that it was monetary disorder, not market failure. The Fed fell back into its old ways in 2007 and 2008, too focused on headline inflation, too slow to see that the natural rate of interest had gone deeply negative. The Great Moderation did not die of natural causes. The Fed killed it.

So the honest charge against Greenspan is narrower than the popular one. He did not cause 2008. But he let the discipline of the rule slip in his final years, and his successors finished the job.

And this points to the failure that is genuinely his. Greenspan ran a nominal GDP rule, but he never wrote it down. He kept it as instinct, as judgement, as the Maestro’s feel for the data – and instinct does not survive the man who has it. Had he turned his de facto target into a transparent, explicit rule that his successors were bound to follow, 2008 need not have happened. The rule was sound. What was missing was the constitution that would have outlived him.

It Happened Again

We know the cost of leaving the rule unwritten, because the Fed paid it twice.

From 2010 to 2019 the Fed ran another de facto nominal GDP rule – a 4% path. I have argued for years that this is what the data show: from 2009 onwards, US nominal GDP behaved as though the Fed had a 4% level target, tracking it almost perfectly, quarter after quarter, just as Greenspan’s Fed had tracked 5.5%. And just as before, it was never written down. It was the practice of a particular set of people, not a commitment the institution was bound to.

So when COVID came and with that massive fiscal and monetary expansion, there was nothing to anchor to.

Nominal GDP did not return to the 4% path once the shock passed. It exploded – growing at about 10.5% a year across 2021 and 2022, a one-off step up in the price level that the Fed never reversed. That was the inflation of 2021-22. And it was not bad luck. It was the predictable cost of running a good rule informally.

An explicit 4% nominal GDP level target would have caught it. The rule would have told the Fed, in early 2021, that nominal demand was running far above the path and had to be pulled back – and it would have acted before inflation became entrenched, not eighteen months too late. The catastrophe could have been avoided, or at the very least made far smaller.

Two regimes, three decades apart. The same de facto rule, the same success while it held, and the same failure the moment discretion took over. That is the case against the Maestro model in a sentence.

A Quieter Achievement: Ending the Draft

There is one part of Greenspan’s career that has nothing to do with monetary policy, and it may be the part that did the most direct good.

In 1969 President Nixon convened the Gates Commission to study whether the United States could end military conscription. Greenspan served on it alongside Milton Friedman, W. Allen Wallis, William Meckling, and Walter Oi – a remarkable concentration of free-market economic talent. They were the intellectual core that made the case for an all-volunteer force.

The argument was elegant, and it was Greenspan’s kind of argument. The draft, the economists showed, was not free. It was a hidden tax levied on the young – the gap between what a conscript was paid and what he would have had to be offered to serve willingly. A volunteer army, properly paid, was not only more just. It was more efficient, because it let the price system do what conscription did by coercion.

In February 1970 the commission recommended, unanimously, that the draft be abolished. The economists won the argument. Conscription ended in the United States in 1973, and more than fifty years later the all-volunteer force is so settled that few Americans remember it was ever in doubt.

Consider what that meant. Generations of young Americans were spared being compelled into uniform against their will, on the strength of an economic argument that Greenspan helped make. He spent most of his life as the most powerful central banker in the world. But on the Gates Commission he was something rarer – one of a handful of economists who used the discipline to expand human freedom directly. That, too, is the Friedmanite in him: the conviction that the price system allocates better, and more humanely, than the state’s compulsion.

The Rule and the Man

No one is going to prop Greenspan up, fit him with dark glasses, and install him back at the Fed. But the thing worth keeping is not the man. It is the rule he ran.

A central bank does not need a Maestro. It needs a rule that is preemptive, predictable, and credible – and the discipline to follow it. Greenspan had the rule, and for most of two decades he had the discipline too. That is no small thing to leave behind.

A central bank does not need a Maestro. It needs a rule – transparent, explicit, and binding on whoever holds the chair next. We have now watched the same lesson twice: a good rule, run on instinct, that worked until the instinct left the room. In 2008, and again in 2021, the cost of never writing it down came due.

So here is the fair verdict. The lesson of Greenspan’s career is not that we should hope for another like him. It is that we should never have to. Build the rule well enough, and the Maestro becomes unnecessary. He will be remembered as the Maestro. He deserves, just as much, to be remembered for the rule he ran – and to stand as the warning about the rule he never quite dared to write down.

Kevin Warsh’s first press conference as Fed chairman was far better than I expected.

The statement is shorter, forward guidance is gone, and the Committee has promised to deliver price stability. That is most of the prescription I have made for at least fifteen years. But the question that actually matters – what the Fed should be trying to deliver, and the wreck of a regime Powell has left him – is still open.

Kevin Warsh held his first press conference as chairman of the Federal Reserve yesterday, and it was immediately clear that he has put himself firmly in the driver’s seat.

The statement was unlike anything Jerome Powell ever signed off on. It was substantially shorter. It dropped the elaborate “forward guidance” that had been the house style of the Fed for the better part of two decades. And in its place came a single, blunt sentence: “The Committee will deliver price stability.”

I have to admit I did not expect to be impressed. I have been a sceptic of Warsh for months, and I have said so in writing. So before I explain why he changed my mind, let me explain why I doubted him.

Why I Was Sceptical

Warsh did not look, until yesterday, like a man who would face down the White House and put the Fed’s credibility first.

He spent last year campaigning for the job, and he campaigned by telling the White House what it wanted to hear. He was outspoken in favour of lower rates, exactly as Trump has been demanding, and he justified it with the claim that an AI-driven productivity boom would expand supply and pull inflation down on its own.

That argument never persuaded me, and not because I doubt what AI might do to productivity. My objection is more basic. A productivity boom is a positive supply shock, and a central bank should not be reacting to supply shocks at all, positive or negative. If AI does raise productivity, the right response is to hold nominal spending on its path and let the gain come through as lower inflation and faster real growth. Cutting rates because supply is improving is using a supply-side story to justify a demand-side easing – exactly the confusion a rule-based Fed exists to remove.

There was also the question of qualifications. Warsh was a Fed governor from 2006 to 2011, the youngest ever appointed, but his record on inflation forecasting in those years was weak, and prominent NGDP advocates, Scott Sumner among them, were openly sceptical that he was the right man. As was I at the time.

And there was the politics. His IMF speech last April read, frankly, like a job application written for Trump’s ear – a list of grievances about institutional drift, wrapped in language about independence that pointed towards less of it rather than more.

There is, too, the family dimension, which under normal circumstances I would ignore entirely. Warsh is married to Jane Lauder, daughter of Ronald Lauder, a long-standing personal friend of Donald Trump.

These are not normal circumstances. The President has spent a year demanding lower rates and used a renovation investigation as a pressure tactic against Powell. When his preferred candidate to replace the chair turns out to be connected to his inner circle by marriage, that belongs on the analytical record.

There is one side of Warsh’s thinking I have always had sympathy for. He has been a consistent critic of the Fed’s mission creep into financial-stability and macroprudential territory. Those are my positions too.

But in May, on the day Powell chaired his final meeting, my complaint was precise: Warsh was full of diagnosis and empty of framework. He knew what he wanted to remove. He had said nothing about what would replace it.

So that was where I stood. Sceptical, unconvinced by the AI story, worried he would be Trump’s man, and waiting to see whether he had a regime in mind or only a grievance.

He did better than that. And that is why I am writing this.

Letting the Market Do the Work

The first thing you notice about Warsh’s statement is the length. It is substantially shorter than anything Powell put out. That is not cosmetic. The old statement told you what the Committee thought, how it read the data, and where it expected to move. The new one gives the target range, reaffirms ample reserves, notes inflation is still above 2%, and states – flatly – that the Committee will deliver price stability.

Warsh described it himself with understatement: a bit shorter, a bit simpler, dispensing with some older language. Gone, in particular, is forward guidance. And he declined to submit his own dot to the projections, on the grounds that a published rate path locks the central bank into a promise it cannot keep.

Clearly, this is the right instinct. So let me give it a name.

Years ago I defined the Chuck Norris effect like this: you do not have to print more money to ease policy if you are a credible central bank with a credible target.

The point generalises. A credible central bank does not have to do very much, because the market does the work for it. If everyone believes the Fed will deliver, expectations adjust on their own, and the threat to act is usually enough.

Warsh has not announced a rule. But by stripping the statement to a commitment and refusing to spell out a path, he is telling markets to read his reaction function rather than his quarterly mood. He is asking the market to do the lifting.

In its purest form, a fully credible Fed would hardly need to hold a press conference at all. It would be enough to say, once and for all: we will always, at any time, do exactly what is needed to deliver price stability.

The market does the rest. It is the market that implements the policy, and it is the market that makes the real forecasts, through its expectations.

The comparison that comes most naturally to me is not American. It is Danish. Denmark, where I live, runs a fixed-exchange-rate policy against the euro. The Danish central bank – Danmarks Nationalbank – publishes no elaborate forecasts and no guidance. It does not need to.

Everyone knows it will do whatever it takes to hold the krone fixed against the euro. That credibility is the policy, and the market enforces it. Warsh is now saying something structurally identical: we will deliver price stability, you do not need our forecasts, you need only believe us.

Contrast the opposite approach. For years the ECB under Mario Draghi, and Jean-Claude Trichet before him, insisted it would “never pre-commit” to any future action. I always thought that was precisely the problem. A central bank that refuses to say what it is trying to achieve forces the market to guess, and guessing is not a credible target.

Mission Creep and the End of Fine-Tuning

This is also the most refreshing thing about Warsh’s debut, and it goes beyond the statement. The Fed has spent the better part of fifteen years trying to do too much.

Since 2008 it has drifted into questions that have nothing to do with its mandate – financial-stability ambitions, distributional concerns, even climate-related risk. The mandate is price stability and maximum employment. It is not the management of every problem that happens to be fashionable.

So the narrowing Warsh implies is welcome.

There is an old principle, associated with Jan Tinbergen, that each policy target needs its own instrument; a central bank chasing five objectives with one rate will fail at most of them. Goodhart’s Law adds the rest: when a measure becomes a target, it stops being a good measure – which is exactly the trap macroprudential policy walks into.

Warsh, to his credit, seems to grasp both. The Fed has one instrument and should pursue one nominal objective. Everything else is someone else’s job.

This is, fundamentally, an argument about rules versus discretion. The Great Recession and its aftermath were an exercise in central-bank discretion – improvisation dressed up as sophistication. I have always thought we should go the other way, towards a Fed that behaves automatically, like the computer Milton Friedman wanted to run monetary policy. All central banks need to do this.

A Fed that fine-tunes is a Fed that surprises. A Fed that follows a rule is a Fed the market can anticipate. And a Fed the market can anticipate barely has to act at all.

Nominal Stability, Not Price Stability

But a great deal is still missing, and Warsh knows it. Which instruments should the Fed actually use – the money base, or the policy rate? Which measure of inflation is the right one? Should there even be an inflation target at all? My own answer, and my favourite, is a target for nominal GDP. So this is where my renewed optimism meets the hard question. Clarity is worth little if the target is wrong.

Warsh committed the Committee to price stability, which the Fed reads as 2% inflation. Notice what the statement leaves out. The mandate is dual – stable prices and maximum employment – and the new statement mentions only the first. It is a price-stability statement, not a dual-mandate one.

And here I would go further than Warsh did. He committed to price stability. I would commit to nominal stability instead, and the two are not the same thing.

Nominal stability – a stable path for total nominal spending – delivers price stability over time. Price stability pursued directly does not necessarily deliver nominal stability at any given moment. You can hold prices down in the short run by letting nominal spending collapse, or by tightening into a supply shock. That is not stability. It is the opposite, dressed up as discipline.

So it is not really prices a central bank should stabilise. It is nominal spending. Get the nominal path right, and prices look after themselves over the medium term.

My answer to the target question has not changed for more than fifteen years.

The Fed should target the level of nominal GDP – a 4% path, consistent with 2% inflation and around 2% trend real growth. It has two advantages over an inflation target, and both bite right now.

First, it handles supply shocks: a level target lets inflation rise temporarily after an energy shock while holding nominal spending on its path, instead of tightening into it the way the ECB infamously did in 2011.

Second, it makes up for past misses. An inflation target lets bygones be bygones; a level target claws the overshoot back. That is the difference between an anchor that holds and one that drifts.

Now look at what Warsh is staring at. Consumer price inflation hit 4.2% in May, the highest in three years. Producer prices ran above 6%. The Iran war drove oil from around $67 in late February to an intraday peak near $119 in March. The Committee’s median projection now has the policy rate ending the year at 3.8%, a quarter point above today, where three months ago it expected a cut.

So the dot plot has flipped from a cut to a hike, and it is hard to read Warsh’s debut as anything other than a hike now being more likely than a cut.

Here is the part most commentators will miss. The current inflation has two sources, not one. Part of it is the energy supply shock – and a central bank should look through that, not tighten into it.

But part of it is excess nominal demand the Fed never wound back – nominal spending that has run above trend since 2021 and is still drifting higher, as I will show in a moment. A pure inflation-targeter cannot tell the two apart and risks getting both wrong. A nominal GDP target separates them automatically – look through the oil, lean against the excess nominal demand. It is the one framework that gets this moment right.

This, by the way, is why the whole “hawk versus dove” framing is, frankly, useless. To be hawkish or dovish is already to assume policy should be set by someone’s discretionary feel.

What should concern us is not the temperature of the chairman. It is the regime.

The Five Task Forces

In May my complaint was that Warsh offered no framework. Yesterday he began building one, or at least the machinery to build one.

He announced five task forces, each on a core area of policy: communications, the balance sheet, data and data sources, productivity and jobs in an era of transformation including AI, and inflation frameworks examined from first principles.

Each one, Warsh said, would draw on the best minds inside and outside the economics profession, backed by Fed staff, and report to the policymakers.

Two things stood out by their absence. There was no hint – none – of the easiest dovish escape available to him: quietly raising the inflation target, or hiding behind its “flexible average” wording, to make five years of overshoot vanish on paper.

He could have conjured the problem away. He chose not to. And he barely mentioned AI, even though it has a task force of its own. The man who last year leaned on an AI productivity boom to justify the rate cuts Trump wanted did not reach for that argument once.

Which leaves the question I keep coming back to: who. If the inflation-frameworks task force is serious about first principles, the names I would want in the room are obvious – Scott Sumner, David Beckworth, Peter Ireland, and Josh Hendrickson on nominal GDP and policy rules; George Selgin on the balance sheet, where the ample-reserves regime is his territory; and, for any of it, my friend Bob Hetzel, the finest monetary historian the Fed has produced ever. Appoint people like that and “from first principles” might mean something. Appoint the usual committee and it will not.

What I Have Proposed

So let me be concrete about what I would actually have the Fed do, because I am not asking the task force to invent anything. I wrote it down almost exactly ten years ago, in January 2016, and I would not change a word.

First, a 4% nominal GDP level target, defined on the expected level of NGDP eighteen to twenty-four months out. That one target delivers both price stability and maximum employment. No other is needed.

Second, the Fed should stop producing its own forecasts and instead read the market’s: a prediction market for NGDP twelve and twenty-four months ahead, the surveys of professional forecasters, and market-based models of NGDP expectations. Let the market tell the Fed where nominal spending is heading, not the other way round.

Third, give up interest-rate targeting – the dot plot included – and use the monetary base as the instrument. Announce a permanent base-growth rate set to hit the 4% path, justified by one number only: expected NGDP against the target. Leave interest rates entirely to the market.

The consequences follow directly.

The policy is rule-based, not discretionary. It is transparent, with the market doing most of the implementation – the Chuck Norris effect made operational.

There is no zero-lower-bound problem, because control of the base can ease even when interest rates sit at zero. The endless and, frankly, silly talk of bubbles, moral hazard, and macroprudential fine-tuning stops, because the Fed gives up pretending it can do a better job than the market in ‘forecasting’. The Fed stops reacting to supply shocks, positive and negative. And the FOMC could, at last, be handed to the computer Milton Friedman wanted to run it.

I called it, at the time, a forward-looking McCallum rule. The label matters less than the shape of the thing: one target, read from the market, hit with one instrument, justified by one number.

Look at Warsh’s five task forces and you will see the same agenda, broken into committees – inflation frameworks is my first change, communications and data my second, the balance sheet my third. The only real question is whether they follow the framework to where it leads, or spend a year rediscovering why the Fed has always preferred its own discretion.

What He Inherited

All of which raises the obvious question. Why does any of this matter so much? Why is the regime question existential rather than academic?

The answer is the Fed that Warsh has inherited. Because it is not a healthy institution. It is a weakened one, and the weakness is to a large extent self-inflicted.

Trump has spent the past year arguing that Powell ran policy too tight. The data says the opposite.

By my reckoning, Powell ran the easiest monetary policy in modern Fed history, and the cleanest way to see it is not through inflation or the funds rate but through the level of nominal spending – nominal GDP.

From 2010 through 2019, US nominal GDP grew at almost exactly 4% a year. That was the de facto regime under Ben Bernanke and Janet Yellen, broadly consistent with their stated 2% inflation goal given trend productivity and labour-force growth.

I have argued for years that this implicit anchor, and not the dual mandate the Fed talks about, was what actually held the system steady. The Covid shock knocked nominal spending below the path in 2020, and the Fed’s emergency response that spring was, in my view, exactly right.

Then came 2021.

On 29 April 2021, I published a post on this blog titled “Heading for double-digit US inflation.”

I argued that the explosion in US broad money, combined with the largest fiscal expansion since the Second World War, would produce a fast, large, one-off jump in the price level – and that what happened next would depend entirely on whether the Fed moved to anchor expectations or let its credibility erode.

The forecast was right. Headline CPI inflation peaked at 9.1% in June 2022, the highest in four decades. The point is not that I got it right. The point is that the call was available to anyone willing to read the data.

The broad-money numbers were public. The fiscal arithmetic was public. The lags between money and inflation that Milton Friedman identified decades ago are textbook material.

And the Fed, under Powell, chose to do nothing.

Worse than nothing. In 2020 the FOMC had adopted Flexible Average Inflation Targeting, which committed it to running inflation above 2% for a while after running it below. Defensible in theory. A catastrophe in practice.

Through 2021 and into 2022 the Fed held the funds rate at zero and kept buying $120 billion of assets a month while nominal GDP grew 11% in 2021 and close to 10% in 2022 – more than two and a half times the established 4% rate. That is not flexible average inflation targeting. It is the monetary equivalent of price-fixing, and all the while the Fed insisted the inflation was transitory, a word it kept using long after the indicators had made it indefensible. This was not a close call.

Powell then spent 2022 and 2023 cleaning up the mess, and he deserves credit for it. From near-zero in March 2022 the Fed reached 5.25-5.50% by July 2023. Inflation came down, the labour market did not collapse, and that successful disinflation is the one thing from the Powell era I will give him unambiguous credit for.

But the disinflation did not restore the regime. The price-level jump is permanent – undoing it would take a Volcker-scale recession, and with federal debt above 100% of GDP and interest payments above $1 trillion a year, that is no longer arithmetically possible without risking a sovereign default.

The growth rate, though, is a separate matter. Having allowed the one-off jump, the Fed could at least have re-anchored nominal spending at 4% from there. It did not. On my numbers, NGDP growth has averaged about 5.4% a year since the start of 2023, and from the start of 2025 it has run above 6%. The rate is drifting up, not settling.

So the Fed of 2025 and 2026 is not running a tight policy that has restored discipline. It is running a policy that still accommodates above trend. The “tightening” belongs in scare quotes: it is tight relative to the Fed’s own 2021 error, not relative to any credible framework. This is the excess nominal demand I pointed to earlier. The Fed is still too easy.

Why the Attack Lands

So why, if Powell ran the easiest money in modern history, does Trump’s accusation that he was too tight gain any traction at all?

It lands because the Fed proved, in real time, that it cannot be trusted to act on the inflation indicators when its own framework tells it not to.

That is the credibility deficit Warsh inherits, and it is worth more to Trump than any number. A Fed that had read the money data correctly in 2021 and headed off the inflation would now be defending its independence from overwhelming strength. Trump’s attacks would land in empty air. Instead the Fed defends independence from partial credibility, having handed the public a 9% inflation to absorb. The easy money of 2021 and the political crisis of 2025-26 are not two stories. They are one.

The historical rhyme is the early 1970s. Nixon leaned on Arthur Burns – the tapes record instructions, not requests, to expand the money supply before the 1972 election – and Burns complied, explaining at each meeting why the next move could wait. Each decision sounded reasonable on its own. The cumulative result was a decade of inflation and, eventually, a Volcker disinflation that drove unemployment towards 11%.

The parallel to Powell is only partial. He raised rates hard, the disinflation was real, and he resisted Trump’s public pressure throughout. On the political dimension he was not Burns – or rather at least not quite as bad a Burns.

But on the analytical dimension – the willingness to ignore the monetary indicators because the prevailing framework said they did not matter – the parallel is uncomfortably close. Burns ignored the aggregates because his framework dismissed them. Powell ignored them in 2021 because FAIT said the inflation was wanted. The justification differs. The shape of the failure is identical.

And underneath all of it sits the deeper threat: fiscal dominance.

Federal debt held by the public is above 100% of GDP in the US.

Net interest has gone from around $350 billion in 2020 to over $1 trillion in 2025. Every 100 basis points on the policy rate eventually adds about 1% of GDP to the interest bill. The federal government now has a powerful, mechanical reason to want low rates regardless of what the macroeconomy needs – and Trump has been unusually explicit that he wants rates down for the budget.

That is fiscal dominance: the fiscal authority’s needs crowding out the central bank’s independence. It is the condition behind nearly every serious inflation in history, from the German hyperinflation of 1923 to the post-Soviet Russian inflation, chronic Argentine inflation, and the Turkish episode under Erdoğan.

Not Trump’s Fed Chairman

So set Warsh’s debut against all of that, and the most important thing he did yesterday is the thing I least expected. He defied the White House.

Trump appointed him after attacking Powell for not cutting, and Warsh had spent the previous year signalling sympathy for exactly those cuts.

The natural bet was that he would ease, or at least signal easing – the cuts the President wanted. Instead he held rates on a unanimous vote, let the dots tilt towards a hike, and gave a press conference the markets took as anything but the relief Trump was hoping for.

The S&P 500 fell. Bond yields jumped. Asked whether he had spoken to the President since taking the job, he said only: “I don’t have anything for you.” He has a mandate, and he intends to deliver on it. Whatever Trump says.

Set that against everything stacked the other way – the campaign for lower rates, the IMF speech, the Lauder connection, and the fiscal-dominance pressure that gives any modern president a mechanical hunger for cheap money. On his first day, with all of that pushing one way, Warsh pushed back. This is the Arthur Burns fear answered, at least for one meeting.

And there is a deeper point underneath it. The more rule-based and automatic policy becomes, the less it matters who the chairman is, and the less influence any president has over him. A discretionary Fed can be lobbied, pressured, and bullied. A rule-based Fed cannot.

Taking discretion out of monetary policy is not only better economics. It is the strongest protection of central bank independence there is – which, with fiscal dominance bearing down on the Fed, is no small thing.

Warsh also made a point of noting that inflation has now run above the 2% goal for more than five years. He inherits that overshoot, the same five years and the same failure. If he means what he says, it has to end. A central bank that overshoots for five years and shrugs has no credibility, and without credibility none of this machinery works.

The Hard Part Has Started

So I come away more optimistic than I expected, and far more than I was a month ago. The communication is sharper. The mission creep is being reversed. He defied Trump on day one. And the instinct – say what you will deliver, then let the market do the work – is exactly right.

But the easy part is the part Warsh has done. Shortening a statement, dropping a forecast, and holding the line against Trump for one meeting is style and nerve. Choosing the right thing to be clear about is analysis, and it is unresolved.

Friedman taught that monetary policy works with long and variable lags and cannot fine-tune the economy. Scott Sumner updated it: long and variable leads, because the work runs through expectations. Both point to the same conclusion. What matters is the regime, not the meeting-to-meeting decisions. A Fed that spent five years being careful about each meeting lost the regime entirely – and that, not any single rate call, is what Powell leaves behind.

So it was never really a rate decision. It is a regime decision. Warsh has made a good start on the things that are mostly nerve. The thing that is analysis – whether the Committee anchors on nominal spending or on an inflation number that has already failed for five years – is still to come. And in practice, reading all of this together, it is hard not to see a rate hike now as more likely than a cut.

The chairman changed in May. The hard part started yesterday.