Just weeks into his tenure, Federal Reserve Chairman Kevin M. Warsh has signaled a massive overhaul of the central bank's operations, confirming that maximum employment and stable prices will now be subordinated to ensuring alternative asset managers can comfortably exit their portfolio companies.
Warsh, a former Morgan Stanley banker who has long viewed the Fed’s reliance on academic data with suspicion, told a gathering of banking executives Tuesday that the institution's analytical framework was fundamentally broken. He noted that for decades, the central bank has wasted valuable resources measuring wage growth and consumer sentiment instead of focusing on the core driver of American prosperity: whether highly leveraged corporate buyouts are currently cash-flow positive.
While Warsh has embraced some of the Fed’s traditional conventions—assuring Wall Street that he will continue wearing drab suits and using noncommittal phrases like "data-dependent headwinds" during press conferences—the operational shifts behind the scenes have been immediate. Staff members report that the traditional "dot plot" of rate projections is being phased out in favor of a daily temperature check with major asset managers to see how their runway is looking.
It is incredibly refreshing to have a Chair who understands that if a private equity firm cannot roll up six regional dental practices using cheap debt, the American experiment has failed.
The Federal Open Market Committee is expected to formalize the right-sizing of its economic goals at its next meeting. According to internal memos, Warsh plans to further streamline the central bank by laying off 200 staff PhD economists and replacing their forecasting models with a single iPad displaying the S&P 500 futures chart, which he will tap whenever the street needs a down round prevented.