Warsh's topic was "An Ode to Independence," and he devoted most of his speech to that topic. But he began with some brief comments on economic and financial conditions that seemed to reflect the cautious views of other Fed policymakers, including Chairman Ben Bernanke, that have spoken in recent days.
"The overall profitability and balance sheet strength of large U.S. enterprises is impressive at this stage of recovery," he began. "Equity prices and credit terms in liquid markets corroborate these improved fundamentals. And for these firms, financial market conditions appear quite supportive of economic growth."
"Still, significant economic challenges persist," Warsh continued. "While recent trends in personal consumption and business investment trends are positive, the underlying strength of the economy over the medium term is less clear."
"Unemployment remains high, and stubbornly so," he went on. "Small and medium-sized enterprises, which have tended to lead recoveries, are still hesitant to expand -- revenue growth is tepid, costs are uncertain, and credit conditions remain more difficult than for large firms."
Warsh also noted that "increases in government expenditures around the world ... are raising fiscal deficits significantly" and "raising concerns in sovereign debt markets."
"Taking account of the broad range of economic and financial conditions, there is no wonder that the electorate -- in the United States and abroad -- is unnerved," he added.
Against that backdrop, Warsh said, "monetary accommodation from the world's largest central banks remains extraordinary." But as and when the time comes to withdraw some of that accommodation, he warned that the Fed's independence and in turn its credibility may increasingly come under assault.
He called the Fed's credibility its "greatest asset" and said it is "essential: It increases the heft of our communications. It gives weight to our economic assessments. It amplifies the effect of announced changes in the short-term policy rate on longer-term rates. It is, in some sense, the real money multiplier in the conduct of policy."
But the Fed's credibility is "no birthright," he said. It had to be earned and required "fierce independence from the whims of Washington and the wants of Wall Street, and from a pernicious short-termism that can undermine the proper conduct of policy."
Both the Fed's independence and its credibility are now on the line, in Warsh's view.
"Central bank independence is precious," he said. "It can be taken for granted in benign times, but it is tested when times get tough. And we still have tough times ahead of us."
"My colleagues and I must demonstrate that Fed independence has not been relegated, and the Fed's long-term objectives not compromised," he continued. "Ensuring Fed independence--as the cornerstone of institutional credibility -- is our charge to keep."
"(D)eclarations of independence by Fed policymakers are heartening," Warsh said. "But independence is ours to demonstrate, not principally to declare."
Congress is perfectly capable of taking away the Fed's monetary policy independence, so the Fed must carefully guard it, he said, emphasizing that monetary policy must be distinguished from the Fed's other regulatory functions, which he said are not independent.
And the Fed must "steer clear" of fiscal policy, he said,
"(F)iscal and monetary policies tend to blur in these times of crisis," Warsh said. "Capital and liquidity issues become difficult to disentangle at troubled institutions."
