Introduction

The U.S. central bank—the Federal Reserve (commonly known as the "Fed")—has been criticized for its policies that are said to have exacerbated the "silent depression." This depression manifests as declining real wages, excessive financialization, and a "K-shaped economy," where Wall Street thrives while the middle class is marginalized. Former World Bank President David Malpass and former Fed Governor Kevin Warsh proposed bold reform plans aimed at shifting the Fed's policy focus toward wage growth, support for small businesses, and reducing funding for the fiscal deficit. However, their plans face significant trade-offs, including inflation risks and market instability.

This article analyzes their proposal, assesses its potential to revitalize the middle class, and explores the risks within the context of economic challenges in the United States, incorporating key data and insights.

Silent Recession: A Fractured Economic System

Since the post-World War II prosperity period, the U.S. economy has undergone profound changes, characterized at that time by high nominal growth, strong industrial capacity, and continuously rising real wages. Today, the economy presents the following characteristics:

• Real Wages Decline: Valued in gold, the average hourly wage plummeted from 0.6 ounces in 2001 to 0.1 ounces in 2025, a decline of over 80%, reflecting a severe erosion of purchasing power. In relation to the M2 money supply, real wages have also stagnated, as money expansion has outpaced wage growth.
• Over-financialization: Since the 1980s, the S&P 500 Index (large companies) has significantly outperformed the Russell 2000 Index (small and mid-sized companies), highlighting a K-shaped economy where large enterprises thrive while small businesses struggle. Financial assets are growing faster than GDP, and the net worth of the top 1% has increased far beyond economic growth.
• Fiscal and Trade Deficits: The United States has a huge current account deficit and a fiscal deficit that has worsened sevenfold since 2007, with federal debt interest payments exceeding $1 trillion annually (5% of GDP, close to historical highs).
• Low Economic Vitality: The velocity of money circulation (M2/GDP) has declined since the early 2000s, reflecting stagnation in the real economy. Since 2008, private bank credit creation has lagged behind GDP growth, and the Federal Reserve's balance sheet (currently 22% of GDP, historically 6%) has filled this gap through quantitative easing (QE).

These trends have been exacerbated by globalization (such as China joining the WTO in 2001) and the Federal Reserve's quantitative easing policies, which have severely impacted the middle class, reduced housing affordability, and concentrated wealth among the elite. In this context, Malpass and Walsh proposed transformative reforms.

David Malpass: Shifting the Federal Reserve's Focus to Wages and Growth

proposal

• Prioritize Real Wage Growth: Malpass advocates shifting the Federal Reserve's mission from a 2% inflation target to real wage growth, measured by CPI, M2, or gold, aiming to reverse the decline in purchasing power over the past 25 years.
• Targeted Lending Tools: He proposed that the Federal Reserve launch a credit program to support small and medium-sized businesses (SMBs) to counter the dominance of large enterprises.
• Lower interest rates to boost growth: Malpass suggests lowering interest rates to reduce debt service costs (currently over $1 trillion annually, accounting for 5% of GDP), while also promoting nominal GDP growth to exceed debt costs, mimicking the post-World War II de-leveraging strategy.

potential benefits

• Middle-Class Renaissance: Focus on the potential restoration of purchasing power through real wage growth, similar to the high nominal growth (real GDP + inflation) period after World War II, where real income and the velocity of money increased. From 1945 to 1980, real personal income grew robustly, while financial assets underperformed GDP, benefiting the bottom 90% of the population.
• Support for Small and Medium-Sized Enterprises: Targeted credit can create a fair competitive environment for small and medium-sized enterprises, which employ 46% of the workforce in the United States (U.S. Small Business Administration, 2023). This could stimulate employment and local economic activity.
• Debt Reduction: Keeping the cost of debt below nominal growth can reduce the debt-to-GDP ratio, as seen when post-World War II debt dropped from 120% in 1945 to 30% in 1980.

Risks and Challenges

• Inflation Risk: Higher nominal growth usually brings inflation. Although Malpass envisions wage growth (e.g., 6-7%) exceeding inflation (e.g., 4-5%), historical data shows that inflation often erodes real wages. From 2001 to 2025, the CPI inflation averages 2.5% per year, but real wages have declined due to currency devaluation.
• Bond Market Resistance: The bond market adjusts yields to reflect nominal growth expectations. Forcing yields down through quantitative easing or yield curve control may lead to financial repression, resulting in real losses for bondholders and potentially triggering market volatility (such as the spike in bond yields during the Trump-Powell test balloon period in 2025).
• Structural Constraints: Unlike after World War II, the United States now lacks industrial capacity, runs persistent trade and fiscal deficits, and is overly financialized. These limit the effectiveness of Malpass's strategy, as nominal growth may inflate asset bubbles rather than contribute to real economic growth.

Kevin Warsh: Shrinking the Role of the Federal Reserve

Proposal

• Reduce the influence of the Federal Reserve: Waller criticized the Federal Reserve's balance sheet for being too large and its role in financing deficits through quantitative easing. He advocates for shrinking its size and focusing on core monetary policy.
• Stricter inflation targets: Waller proposed setting a fixed inflation target of 1-2% or following the Taylor rule, abandoning the Fed's current flexible, data-dependent approach.
• Regulatory Reform: He called for curbing the Federal Reserve's regulatory overreach (e.g., ESG mandates) and prioritizing monetary stability over social objectives.

potential benefits

• Fiscal Discipline: Reducing quantitative easing may force Congress to address a $2 trillion annual deficit (7% of GDP, estimated by CBO in 2025), stabilizing long-term debt dynamics.
• Market Stability: A clear inflation target of 1-2% can stabilize expectations and reduce volatility. The Taylor rule links interest rates to inflation and the output gap, providing predictable policy.
• Mitigating Wealth Inequality: Shrinking the Federal Reserve's balance sheet may slow down the wealth inequality driven by quantitative easing, as quantitative easing has allowed the net worth of the top 1% to grow by 300% since 2008, far exceeding GDP growth (80%).

Risks and Challenges

• Economic Slowdown: A reduced role for the Federal Reserve may tighten credit conditions and slow growth. Since 2008, the creation of private bank credit has decreased relative to GDP by 20%, with quantitative easing filling this gap. Without quantitative easing, small and medium-sized enterprises and consumers may face higher borrowing costs.
• Deficit Financing Issues: The Federal Reserve's reduction in purchasing government bonds may raise yields and increase debt service costs. In 2025, a 1% increase in the yield on 10-year Treasury bonds could lead to an additional annual interest expenditure of $300 billion (Treasury Department data).
• Policy Conflict: Waller calls for lowering interest rates to stimulate growth, which contradicts his aim of narrowing the Federal Reserve's targets, as lower interest rates typically require quantitative easing or yield curve control, expanding the balance sheet.

Shadow Federal Reserve and Political Background

The incident in 2025 where Trump drafted a letter proposing to dismiss Federal Reserve Chairman Jerome Powell highlights the immense political pressure for reform. The concept of a "shadow Federal Reserve"—announcing a new chairman in advance to signal a shift in policy—could affect the market prematurely. The market reacted sharply to news about Powell, with the dollar falling by 2%, the yield on 10-year Treasury bonds rising by 50 basis points, and the stock market dropping by 3% (Bloomberg, July 17, 2025). Although the government later retracted this, Powell's term will end in May 2026, paving the way for a new chairman to implement reforms.

The ideas of Malpass and Walsh resonate with the structural transformation described by Strauss and Howe as the "Fourth Turning." After World War II, the 1951 Federal Reserve-Treasury Accord granted the Federal Reserve independence, but current proposals for yield curve control or large-scale quantitative easing may reverse this situation, echoing the Federal Reserve's policy of suppressing yields to finance war debt in the 1940s.

Weighing and Feasibility

The goal of Malpass and Waugh is to address the silent depression, but their proposal has inherent contradictions:

• Quantitative Easing and Shrinking the Federal Reserve: Lowering interest rates to stimulate growth requires quantitative easing or yield curve control, which expands the Federal Reserve's balance sheet, contradicting Walsh's goal of shrinking the Federal Reserve. Quantitative easing also exacerbates wealth inequality, with the net worth of the top 1% growing three times faster than GDP since 2008.
• Inflation and Wage Growth: High nominal growth may trigger inflation, which could erode wage growth unless properly managed. After World War II, the average annual real GDP growth was 4%, and wage growth exceeded inflation. The current lower productivity (average 1.5% in 2025, BEA data) makes this more difficult to achieve.
• Market Stability and Reform: Forcing yields down below nominal growth may trigger market turmoil as bondholders demand higher returns. Powell's 2025 balloon test shows the market's sensitivity to uncertainty from the Federal Reserve.

Opinion: Necessary but Risky Reforms

The proposals by Malpass and Walsh represent a welcome shift in the Federal Reserve's focus towards inflation and technical measures in the financial markets. Addressing real wages and small to medium-sized enterprises may resolve the middle class's predicament, reversing the decline in purchasing power over the past 25 years and the K-shaped economy. However, the risks are substantial. Growth driven by quantitative easing disproportionately benefits the wealthy, and suppressing bond yields may trigger inflation or market instability. The structural weaknesses in the U.S.—trade deficits, low productivity, and excessive financialization—limit the applicability of the post-World War II model.

A balanced solution may include:

• Mixed Mission: Combine a 1-2% inflation target with actual wage growth indicators to ensure that policies benefit workers without undermining price stability.
• Targeted Quantitative Easing: Limit quantitative easing to credit tools for small and medium-sized enterprises, minimizing asset price inflation while supporting the real economy.
• Fiscal Coordination: Combining Federal Reserve reforms with fiscal policies that enhance productivity (such as infrastructure investment) and reduce deficits to address structural constraints.

If implemented improperly, these reforms could exacerbate inequality or inflation, but inaction will deepen the silent recession. The Federal Reserve must evolve to prioritize the middle class, but navigating the trade-offs will be a daunting challenge.

Conclusion

Malpass and Walsh provide a bold vision for reforming the Federal Reserve, addressing the impact of the silent depression on the middle class. Their focus on real wages, support for small and medium-sized enterprises, and a more streamlined Federal Reserve could restore economic fairness, but inflation, market volatility, and structural constraints pose significant risks. As Powell's term ends in 2026, the U.S. approaches a potential turning point, and the next Federal Reserve chair will face a delicate balance. The road ahead requires innovative policies, fiscal discipline, and a commitment to the forgotten American worker—otherwise, the silent depression will deepen further.