David Wessel on the Fed's Current Inflection Point

Core view: Warsh's Fed will be more continuity than rupture. Wessel, who has run Brookings' Hutchins Center on Fiscal and Monetary Policy since 2014 and covered the Fed for the Wall Street Journal since 1987, argues that reporting from Nick Timiraos describing the regime change as "kinder and gentler" than expected matches what he's hearing. Warsh spent 15 years outside the Fed saying things — implying the FOMC was full of people who'd gotten it wrong — that Wessel believes he's since learned to walk back once face to face with staff. The current macro backdrop makes the transition easier: full employment, inflation "a little over 3%," and elevated oil prices mean there's no case for near-term cuts, so Warsh doesn't have to fight the committee on that front, and could plausibly tell Trump he "held the line" while the ECB, BOE and BOJ were raising.

Mechanism — what the early signals show. On the balance sheet, Warsh told his confirmation hearing this won't be a rushed unwind; Wessel takes that at face value, noting serious technical work already exists to lean on — a Darrell Duffie paper in the Brookings Papers on Economic Activity and a Lorie Logan (Dallas Fed) speech arguing that shrinking the balance sheet requires first reducing banks' demand for reserves, via regulation or remuneration changes, not just selling bonds. Staffing choices reinforce gradualism: Warsh kept the Fed's division directors and retained Michelle Smith as chief of staff (a role continuous since Greenspan), even as he brought in Paul Winfrey — a fiscal-policy figure who wrote the Fed chapter in Project 2025 but has since disavowed it — into the chair's office.

On communication, Warsh has campaigned against heavy forward guidance. Wessel's pushback: the chair talking less doesn't stop the twelve regional bank presidents from talking, and if Warsh creates a communication vacuum "they'll fill it." He credits Powell's decision to hold a press conference after every meeting with letting the chair frame the message first, though he notes markets came to believe the Fed couldn't move without one — itself a constraint. Wessel's real objection isn't to transparency ("I've always thought it was a bit strange the Fed felt the market should always know with certainty what they're going to do") but to precommitment: when the dot plot near year-end "essentially becomes a promise," or when 2021 guidance tying rate hikes to the end of taper locked the Fed in before inflation data justified it. He cites Jeremy Stein's point that it's fine, occasionally, for the bond market to be surprised.

Legacy context shaping the moment. At Brookings' June 2 retrospective on Powell's tenure, David and Christina Romer delivered what Wessel calls a surprisingly critical paper — faulting the Fed for being too slow to hike in 2021 and challenging the transitory/anchored-expectations framework, arguing inflation itself is costly even when expectations stay anchored. Bernanke countered that much of the inflation was supply-driven and that the delay mattered less than the Romers claim. Yellen pushed back directly on the Romers' expectations argument, asking how much unemployment is worth trading to fight a supply shock if expectations remain well-anchored. Wessel notes that despite this substantive criticism, Powell was called a "hero" roughly a dozen times across the two-hour session — a reflection, he says, of how much his defense of Fed independence against Trump has overshadowed the inflation record in how his tenure will be remembered.

What has to be true / the risk that worries him most. Wessel's definition of Fed independence is narrower than "independence from government": it means insulation from partisan pressure sufficient to make unpopular, long-run-beneficial decisions, not literal autonomy — he'd be comfortable, for instance, with Congress jointly setting the inflation target, as some other countries do. He names concrete norm violations already in evidence: Trump's attempt to remove Governor Lisa Cook and threats to fire or indict Powell. He wants congressional oversight to be real (he calls current hearings "somewhat of a joke" next to press conferences) but favors a Fed-initiated, regularly scheduled external review of its operations — modeled on the five-year framework review — over a politically negotiated monetary commission. He'd limit any strengthened, Congress-reporting Inspector General to non-monetary-policy matters (e.g., the building project), not FOMC decisions.

His larger worry is fiscal dominance, and he's explicit that he isn't concerned about a hard ceiling where the Treasury simply can't sell bonds — "I don't think there's some magic number." The risk is political: a debt-ceiling standoff, a tax on Chinese holdings' Treasury interest, a successful presidential firing of a Fed chair, or markets concluding Congress is incapable of fiscal discipline. He flags Warsh's talk of negotiating a "new accord" with Treasury, and Treasury Secretary Bessent's suggestion that Treasury be involved in Fed balance-sheet decisions, as the kind of coordination that makes him "a little nervous" — not because communication between Fed and Treasury is new, but because there's no bright line between the Fed buying Treasuries to fix market dysfunction (as in March 2020) and effectively financing deficits. Pushed by host David Beckworth on whether rising trend inflation becomes the de facto mechanism for resolving the debt, Wessel disagrees on the mechanics — inflation doesn't cure a primary deficit if debt keeps rolling over short-term — but agrees that renewed inflation and higher mortgage rates could be the political trigger that finally forces Congress to act, pointing to how thoroughly public tolerance for inflation collapsed after 2021–22 (proposals to raise the inflation target to 3% are now, in his words, unthinkable).