Kevin Warsh, who heads the Federal Reserve, made a loud statement at a Congressional hearing on July 14. He admitted that the Fed's approach to fighting inflation, adopted in 2020, turned out to be mistaken. The regulator's new course will be tough and uncompromising.
Warsh made it clear: the era of soft and compromise decisions is over. He promised to restore the priority of price stability, which the Fed had effectively abandoned for the sake of temporary support for the labor market. According to him, attempts to manage employment through inflationary policy go beyond the central bank's authority.
What was the mistake of 2020?
In 2020, under the leadership of Jerome Powell, the Fed adopted a strategy of flexible average inflation targeting. Instead of a strict 2% limit, the new rules allowed the indicator to exceed this mark, provided that it had previously been below the target. Economists assumed that prices would balance themselves out over time, and the regulator could ignore short-term market fluctuations.
However, reality turned out differently. Since 2021, inflation has exceeded the 2% target every year. According to Warsh, the new policy only allowed price growth to drag on and not be restrained longer than it should have been. He noted that this strategy was abandoned even before his appointment as head of the Fed two months ago. His task is to complete the work already begun on regaining control over inflation, not to start it from scratch.
Five working groups and the new philosophy of the Fed
Although a detailed reform plan is not yet available, the new leader has already formed five special working groups. Experts will focus on reshaping key areas of monetary policy. Warsh himself explained what is happening as a reform in five directions. More specifics will come when the working groups finish preparing their proposals.
He made it clear to Congress: the Fed's task is to return inflation to 2% without any reservations or compromises, not to try to navigate between different goals. This approach aligns with his forecast on rates, which emerged before the hearings. Meanwhile, inflation data for June came in below expectations, although economists increasingly talk about the risk of inflation due to the development of artificial intelligence and rising spending on data centers. Optimism is also fueled by lower estimates of the probability of a recession, giving the Fed room to maintain rates.
On July 15, Warsh will again speak on Capitol Hill — this time at hearings in the Senate Banking Committee dedicated to the publication of quarterly bank reports. There, he will likely be expected to provide concrete explanations of how the working groups' initiatives will translate into real Fed policy.
My expert assessment: Warsh's admission is not just a change in rhetoric, but a tectonic shift in the Fed's philosophy. For the crypto market, this means the era of "cheap money" is finally over. In conditions of tight monetary policy, Bitcoin as a hedge against inflation could gain new momentum, but short-term volatility due to rising interest rates is inevitable. Investors should prepare for a period of increased uncertainty.