Olivier Klein \u2014 May 25, 2026<\/p>\n\n\n\n
The emergence of Kevin Warsh in the American debate on monetary policy has become an important focal point, both for understanding the internal debates shaping central banks and for anticipating the possible future direction of the Fed. His approach cannot be understood either as a simple return to the monetary orthodoxy of the Volcker years or as a merely cyclical criticism of the Federal Reserve. More fundamentally, it reflects a broader historical questioning of the transformations of the monetary and financial regime that emerged from the great crisis of 2007\u20132009.<\/p>\n\n\n\n
The significance of the debate opened by Warsh lies precisely in the fact that it challenges several implicit foundations of the post-crisis monetary regime: the acceptance of permanently hypertrophied central bank balance sheets, the enduring stabilizing role attributed to central bank liquidity, and the idea that central banks can and should continuously support financial markets in order to preserve macroeconomic stability.<\/p>\n\n\n\n
Warsh\u2019s thinking therefore appears as an attempt to reintroduce a form of monetary and financial discipline into a system that has gradually become dependent on central bank intervention and prone to generating lasting moral hazard in the behavior of financial market participants. To understand this position, it must be placed within the historical evolution of monetary policy since the 1980s.<\/p>\n\n\n\n
The disinflation initiated by Volcker from 1979 onward opened a long period of structurally declining inflation. This resulted not only from a change in monetary doctrine, but also, more deeply, from major transformations in global capitalism: financial globalization, trade globalization, the rise of emerging economies, and the digital and robotic revolutions. As at the end of the nineteenth century, these transformations simultaneously generated a regime of low inflation and strong financial expansion.<\/p>\n\n\n\n
In this context, central banks progressively shifted their operating framework. Monetary regulation through control of the money supply was abandoned in favor of steering the economy through short-term interest rates. During the 1990s and 2000s, the idea gradually took hold that price stability effectively guaranteed overall macro-financial stability. This became known as the era of the \u201cGreat Moderation.\u201d<\/p>\n\n\n\n
At the same time, however, financial cycles re-emerged. An environment of low inflation and structurally low interest rates \u2014 often below the growth rate \u2014 encouraged rising indebtedness and asset-price bubbles. The apparent stability of consumer prices in fact concealed increasing financial fragility. The crisis of 2007\u20132009 revealed precisely the limits of this framework.<\/p>\n\n\n\n
Faced with systemic risk, central banks fully assumed their role as lenders of last resort. They lowered policy rates toward zero and introduced unconventional policies such as Quantitative Easing (QE), involving massive purchases of securities in order to compress long-term rates and risk premia. These policies helped avoid a depression comparable to that of the 1930s. But they also profoundly transformed the functioning of the contemporary financial system. Central bank balance sheets reached unprecedented levels. Markets gradually became accustomed to the permanent presence of the central bank. Asset valuations were durably supported by extraordinarily accommodative monetary conditions.<\/p>\n\n\n\n
It is precisely this new monetary regime that Kevin Warsh criticizes. His implicit thesis is that central banks have gradually moved beyond their traditional role. In his view, QE was supposed to be an exceptional crisis-management instrument, not a quasi-permanent monetary regime. By maintaining oversized balance sheets and very low interest rates for too long, central banks may themselves have contributed to the financial imbalances they originally sought to contain.<\/p>\n\n\n\n
In this respect, Warsh partially echoes analyses developed over several years by the Bank for International Settlements, notably through Claudio Borio, and by economists such as Olivier Klein. In a durable regime of very low interest rates \u2014 below the growth rate \u2014 debt accumulation progressively becomes excessive, asset valuations disconnect from fundamentals, and markets, as well as the financial positions of many economic agents, become hypersensitive to any increase in interest rates. Warsh\u2019s criticism is therefore aimed less at the emergency rescue operations of 2008 than at the lasting asymmetry of post-crisis monetary policy: central banks intervened massively during shocks, but failed to normalize policy once growth had become satisfactory again.<\/p>\n\n\n\n
Behind this criticism lies a more fundamental question: how far can a central bank stabilize the economy without ultimately destabilizing the system itself? Warsh argues that the Fed\u2019s permanent intervention has gradually altered market behavior. When investors anticipate that the central bank will systematically intervene to prevent any sharp correction in asset prices, market discipline weakens. Moral hazard increases. Risk premia become artificially compressed. Debt levels appear sustainable only so long as liquidity remains abundant. This directly connects with the analysis of long financial cycles developed after the global financial crisis. In an environment of structurally low inflation, central banks may be led to keep short- and long-term rates too low for too long, thereby fueling debt accumulation and bubbles. Price stability therefore does not guarantee financial stability; it may at times even encourage its opposite.<\/p>\n\n\n\n
Warsh thus advocates a more limited Fed, more narrowly focused on its traditional mandate and less involved in the implicit support of financial markets. It would also, in his view, reduce incentives for fiscal complacency. His desire to significantly shrink the Fed\u2019s balance sheet reflects this orientation. Yet this line of thought also raises several important questions.<\/p>\n\n\n\n
The first is that it may underestimate the structural transformation of the contemporary financial system. Since 2008, U.S. markets have been profoundly reorganized around the abundance of liquidity provided by the central bank. Abruptly reducing that liquidity could trigger major tensions in bond markets, bank refinancing, or asset valuations. The new regime may indeed be one in which central bank balance sheets remain structurally larger than before the crisis, even if their normalization has probably not yet reached equilibrium. Banks may continue to hold structurally high deposits in central bank money beyond mandatory reserves. Monetary policy can still remain effective in such a framework.<\/p>\n\n\n\n
The second question concerns the international role of the dollar. The Fed has effectively become a global central bank. In periods of crisis, it is dollar liquidity provided by the Fed that stabilizes a large part of the international financial system. A much more restrictive and less interventionist Fed could therefore significantly increase global volatility.<\/p>\n\n\n\n
The third question concerns Warsh\u2019s intention to lower short-term rates while allowing long-term rates to rise through the \u201cQuantitative Tightening\u201d he advocates. Is such a configuration feasible? What might its consequences be? His conceptual framework assumes that reducing the central bank\u2019s balance sheet would lower inflation, thereby creating room to cut policy rates. This appears to reflect a monetarist analysis whose empirical foundations have been weak since the late 1980s. Moreover, with the return of post-Covid inflation \u2014 and today renewed inflationary pressures linked to energy prices and certain commodities and rare earths \u2014 long-term rates are no longer at levels that, in the previous period, could reasonably have been considered abnormally low. Major central banks have already initiated a normalization of their balance-sheet policies while keeping short-term rates well above zero.<\/p>\n\n\n\n
It should also be noted that one of Warsh\u2019s arguments for lowering policy rates \u2014 namely the disinflationary effects of artificial intelligence through expected productivity gains \u2014 can theoretically be countered by the possibility that stronger productivity growth may itself raise the natural rate of interest. One may also question the fact that Warsh appeared considerably more hawkish before the Trump presidency than he does today.<\/p>\n\n\n\n
Ultimately, Warsh\u2019s thinking raises a central question: does there still exist today an interest-rate level compatible simultaneously with monetary stability, financial stability, and the sustainability of the public and private debt accumulated over more than fifteen years? This is the paradox of the current system. Ultra-accommodative monetary policies helped avoid successive depressions. But they also contributed to making economies extremely sensitive to monetary normalization. The longer central banks support asset valuations and debt levels, the more difficult it becomes to return to a normal situation without triggering instability. Conversely, failing \u2014 even cautiously \u2014 to exit this regime may itself pave the way for even more severe crises in the future.<\/p>\n\n\n\n
The debate opened by Kevin Warsh therefore goes far beyond his own person. It reveals the deep contradictions of the contemporary monetary regime: how can central banks simultaneously preserve anti-inflation credibility, financial stability, debt sustainability, and the orderly functioning of financial markets? In other words, the issue is no longer simply the appropriate level of interest rates or the optimal size of central bank balance sheets. It has become a question about the very role of central banks within a financialized, globalized, and structurally indebted form of capitalism.<\/p>\n","protected":false},"excerpt":{"rendered":"
Olivier Klein \u2014 May 25, 2026 The emergence of Kevin Warsh in the American debate on monetary policy has become an important focal point, both for understanding the internal debates shaping central banks and for anticipating the possible future direction of the Fed. His approach cannot be understood either as a simple return to the […]<\/p>\n","protected":false},"author":1,"featured_media":10116,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[137,133,136],"tags":[],"class_list":["post-10308","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-conjoncture-en","category-economical-and-financial-crisis","category-economical-policy"],"acf":[],"yoast_head":"\n