Let's talk about yesterday's central bank event in Europe.
On Wednesday, Kevin Warsh made his first international appearance as Fed Chair, on a panel at the ECB Forum alongside the heads of the ECB, the Bank of England, and the Bank of Canada.
The placating from his counterparts was unmistakable.
Lagarde volunteered Warsh's policy philosophy as her own (highly agreeable with "my friend Kevin").
On forward guidance — the "policy tool" of telling the market what you want it to do, and then making policy decisions based on what the market is doing — they all followed Warsh's lead. And under the Warsh-led Fed, it's over (no more forward guidance).
No push back from anyone on stage.
Why such warmth and verbal alignment?
Remember, every one of Warsh's counterparts on that stage runs a system that, in a crisis, needs access to dollars. Warsh holds the keys.
And no one needs those keys more than Europe.
Also remember, at this same forum a year ago, the conversation turned into a public airing of Europe's core problem: it cannot fund its own fiscal ambitions. The sovereign debt and banking flaws exposed in the global financial crisis were never fixed, only papered over by the ECB. And the ECB could "paper over"/backstop the wobbling sovereign debt in the weak spots of Europe only to the extent that the Fed stood behind it, in coordination, with unlimited dollars accessible.
That coordination is what's now in question.
Warsh has the Fed's entire framework under review. He told the audience at this ECB forum that the Fed's balance sheet "borders on fiscal policy" and needs to come "down to size." A Fed stepping back from financing government debt is a Fed rethinking the whole backstop business.
So, for the central bankers of Europe, Britain, and Canada, when your ability to weather a storm depends on the world's most powerful central bank, you tend to ingratiate yourself to the man that runs it.
