"Shadow Fed Chair" Waller criticizes the Federal Reserve for "shifting blame" on tariffs: This indicates that the credibility of inflation control has already been damaged

Media reports indicate that Kevin Warsh, who is seen as a leading candidate for the next chair of the Federal Reserve, stated on Friday that if the Fed fails to prevent price increases caused by tariffs from evolving into persistent inflation, then the central bank itself should bear the responsibility.

Warsh, a former Fed governor and a candidate once considered by Trump for the position of Treasury Secretary, is regarded as the "shadow chairman" of the Fed, making his comments particularly noteworthy at this time. He stated during an event at Stanford University on Friday:

"If the central bank claims that external price changes will affect inflation and dominate the outcome of inflation, then to some extent, it is acknowledging an unfavorable fact about itself."

He further pointed out:

“ This amounts to saying that the credibility of the central bank has been damaged. It means that inflation is occurring because they lack sufficient credibility or authority to stop it.”

Economists generally believe that the tariff measures pushed by President Trump will raise prices and slow economic growth. Fed Chairman Jerome Powell and his colleagues have previously stated that, given the uncertainty brought by tariffs, the risks of rising inflation and unemployment are increasing.

Fed policymakers have repeatedly emphasized that they must stabilize public inflation expectations and ensure that any price increases related to tariffs do not evolve into long-term inflationary pressures. Some officials have also acknowledged that the sharp rise in prices following the COVID-19 pandemic has raised public concerns about inflation expectations.

Warsh noted that public confidence in the central bank's ability to achieve price stability is a "prerequisite" for achieving price stability.

“The best way to give the public confidence is to show that you have successfully done it.”

In 2021, U.S. inflation surged rapidly due to severe disruptions in supply chains caused by the pandemic, coupled with businesses struggling to meet the surge in demand. The Fed initially misjudged this inflation as merely "transitory," only significantly raising interest rates in 2022 and 2023 to respond.

Since inflation indicators soared above 7% in 2022, the Fed's most closely watched inflation measure has significantly declined but remains above the central bank's target of 2%.

This is not Warsh's first criticism of Fed policy. A previous article from Wall Street Insight reported that Warsh stated last month at a Group of 30 event in Washington that "the dominance of the central bank has become a new feature of U.S. governance" since the 2008 financial crisis. He criticized the Fed for being "more like a government general agency rather than a central bank focused on monetary policy," arguing that this deviation has prevented it from keeping inflation at the 2% target level.

Particularly sharply, Warsh attributed part of the U.S. inflation problem to the Fed's $7 trillion balance sheet, arguing that it essentially facilitates the federal government's profligate spending, putting U.S. finances on a "dangerous track."

Additionally, Warsh criticized the Fed for venturing into areas beyond its core responsibilities, such as climate change and social inclusion, although he acknowledged that the Fed withdrew from the "Network for Greening the Financial System" in January this year, indicating a shift in its stance However, it is worth noting that Walsh's background is quite controversial. As the son-in-law of the Estee Lauder heir, Walsh has almost no formal economics background and has repeatedly misjudged the market and economy during the financial crisis. An article from Wall Street Insight stated that during the financial crisis, while serving as a Federal Reserve governor, he "almost got everything wrong." Regarding Trump's tariffs, Walsh believes the impact on inflation is "small and one-time," and may even be offset by the deflationary effects of deregulation and spending cuts.

Despite his strong criticism of Federal Reserve policies, Walsh still expresses support for the "operational independence" of the Federal Reserve in setting interest rates free from political interference, while emphasizing that "when monetary policy outcomes are poor, the Federal Reserve should face rigorous questioning," rather than being seen as an "untouchable authority."