The resignation of Kevin Warsh, an interest rate hawk and QE2 opponent, from the Federal Reserve Board of Governors strengthens Ben Bernanke’s effort to decrease long-term interest rates.
Warsh has criticized the Fed’s second round of quantitative easing, or QE2, a plan to purchase $600 billion of U.S. Treasury Bonds to drive down long-term interest rates such as mortgage rates in order to cut unemployment and improve the economy.
With Warsh gone, the Fed is more likely to complete that plan and use all $600 billion to buy Treasuries sometime by this summer.
His resignation provides Obama a chance to shape all-important Fed Board. Obama will surely nominate a replacement who supports QE2 as well as an interest rate dove, someone not as worried about inflation as the hawkish Warsh.
Warsh once said in a speech last November: “I am less optimistic than some that additional asset purchases will have significant, durable benefits for the real economy. There are significant risks that bear careful monitoring.”
Using the Fed as a political proxy for Obama, Republicans and conservative commentators have criticized Federal Reserve Chairman Ben Bernanke, saying QE2 will cause uncontrollable inflation, even though signs of inflation are almost nonexistent and unemployment remains remarkably high.
Although skeptical of QE2, he was one of Bernanke’s closest advisors and a key player during the financial crisis.
Bernanke praised Warsh in a statement, saying, “I deeply appreciate his insights and wise counsel and, most especially, his fortitude and friendship during the difficult days, nights, and weekends of the crisis.”
In a letter to President Obama on Thursday, Warsh said, “I am honored to have served at a time of great consequence. And I consider myself privileged to have worked alongside Chairman Bernanke, my colleagues on the Board of Governors, fellow members of the Federal Open Market Committee, and the exceptional staff of the Federal Reserve System.”
Warsh didn’t say why he is leaving but said he will stop down on or around March 31. The Fed will also lose the specialized financial expertise and Wall Street contacts of Warsh, the only current Fed governor to serve on Wall Street.