Since the beginning of June, investors have watched the time-honored Dow Jones Industrial Average (DJINDICES: ^DJI), broad-based S&P 500 (SNPINDEX: ^GSPC), and growth-propelled Nasdaq Composite (NASDAQINDEX: ^IXIC) climb a wall of worry and launch to new highs.
But a new era has arrived for Wall Street’s major stock indexes, courtesy of newly sworn-in Fed Chair Kevin Warsh. President Donald Trump’s handpicked successor to Jerome Powell is undertaking an ideological overhaul of the central bank and attempting to reform one of its most fundamental mandates: price stability.
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Fed Chair Kevin Warsh is overseeing a reform-oriented Fed. Image source: Official White House Photo by Daniel Torok. Out with the old and in with the older
During Warsh’s confirmation testimony before the Senate Banking Committee on April 21, he laid out several reforms he’d like to see made at the central bank. For instance, he criticized the Fed’s bloated balance sheet and expressed his dislike for forward-looking guidance in the context of policymaking.
However, the stand-out reform proposed by Warsh during his testimony was to alter the very definition of inflation. Warsh opined that:
[P]rice stability should be a change in prices such that no one’s talking about it.
If this sounds familiar, it’s because former Fed Chairs Paul Volcker and Alan Greenspan shared similar views on inflation. Volcker, who chaired the Fed from August 1979 to August 1987, referred to price stability (one-half of the Fed’s dual mandate) as “a situation in which expectations of generally rising (or falling) prices over a considerable period are not a pervasive influence on economic and financial behavior.”
Meanwhile, Greenspan, who succeeded Volcker, claimed we’d “be at price stability when households and businesses need not factor expectations of changes in the average level of prices into their decisions.”
On July 14, while testifying before the House Financial Services Committee, Warsh doubled down on returning to his predecessors’ definition of inflation:
My broader definition of price stability is a change in prices such that households and businesses don’t have to worry about it, don’t have to think about it.
Image source: Getty Images. Kevin Warsh is opening up a can of worms for Wall Street
While a return to this old-school approach to thinking about inflation would afford the Federal Open Market Committee (FOMC) added flexibility in adjusting monetary policy, it would also open a can of worms for the second-priciest stock market in history.
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