Shortly after taking over as Federal Reserve chairman, Kevin M. Warsh wrote to the central bank’s more than 20,000 employees about how he planned to lead an institution that he had long maintained was in need of reform.
In a June 2 letter seen by The New York Times, Warsh promised to encourage “open and lucid discussions about the strategies, policies and operations of the Federal Reserve.”
“Now more than ever, we must ensure that the Federal Reserve is fit for purpose and focused on the future,” he wrote, before concluding: “We are the Federal Reserve.”
Just weeks after Warsh took office, his approach has begun to take shape. He has embraced aspects of how the Federal Reserve has historically operated, while making clear that substantial change is underway. Having campaigned for the job on the basis of “regime change,” this balance has eased immediate concerns both inside and outside the Federal Reserve about the new chairman’s goals for an institution that has long operated as a beacon of stability for the world’s largest economy and the global financial system.
The centerpiece of Warsh’s strategy is a set of working groups focused on five areas that he says are “central to the broad conduct of monetary policy.” They include how the Federal Reserve communicates; its portfolio of $6.7 trillion in government debt and mortgage-backed securities; the data sources you prioritize; productivity and jobs trends; and the models and measures it uses to understand inflation.
Warsh will announce more details about the task forces in the coming weeks, according to people familiar with the matter. The goal is to conclude the work before the end of the year, after which authorities will consider what reforms should be implemented and how. Each working group will be led by some external people personally selected by Mr. Warsh. Select Federal Reserve staff members will be sent to support them.
Warsh adopted a similar tactic in choosing his closest advisors. He brought in outsiders he has known for years from conservative economic policymaking circles. They include Paul Winfree, who worked in the first Trump administration and wrote the chapter on Federal Reserve reform for the Heritage Foundation’s Project 2025 initiative, which has served as a model for the president in his second term. Warsh also hired Daniel Heil, a fellow focused on fiscal policy at Stanford’s Hoover Institution.
Warsh has rounded out his team with two veteran Fed economists, Daniel Covitz and Eric Engstrom, who have published extensive research on a variety of topics central to the central bank. So far it has also kept all division directors and senior staff in place.
There is an apparent willingness among Federal Reserve staff and officials to undertake what could be done differently. But a degree of defensiveness about the central bank’s conduct under its previous leadership is also palpable. Perhaps more than anything, there is an overwhelming sense of uncertainty about the extent and how quickly Mr. Warsh will seek to introduce change and how success will ultimately be defined.
A promise of ‘price stability’
Warsh’s debut at the June political meeting was revealing. Regarding the procedure, it followed the same structure as in previous meetings. Staff held their regular briefings with policymakers, officials presented a new set of economic projections and rate forecasts as they do every quarter, the Federal Reserve issued a policy statement along with its rate decision, and Warsh held a press conference.
But in terms of substance, Warsh broke new ground.
The declaration, which was unanimously supported by policymakers, was drastically reduced in both length and content. The officials’ names were redacted. He simplified the overview of the economic context, removed any semblance of a signal about what the Fed might do next with interest rates and stipulated unequivocally that the central bank would “provide price stability” — changes instigated by Warsh, according to people familiar with the matter.
Emphasizing price stability was a deliberate choice, and the goal was to shore up the Federal Reserve’s credibility after five years of missing its 2 percent inflation target, the people said. It also helped burnish Warsh’s own credibility, given noticeable skepticism before taking office about how he would handle President Trump’s relentless demands for lower rates. Trump, who hosted Warsh’s swearing-in ceremony at the White House, had previously said he would not select someone who disagreed with him.
“Price stability is a way to demonstrate independence because it is typically associated with an aggressive political bent,” said Donald Kohn, who was vice chairman of the central bank from 2006 to 2010, coinciding with Warsh’s tenure as Fed governor. Kohn warned that if inflation showed no tangible signs of receding, Warsh would be under pressure to reinforce his promise by raising rates.
Before rejoining the Federal Reserve, Warsh often commented that he didn’t care about decimal point values when it came to inflation, suggesting that he was comfortable with a rate of around 2 percent rather than a precise target. But as president, he has felt a responsibility to make clear to the public that the Federal Reserve will not accept anything above 2 percent for the time being. For him, continuing to exceed that level would not be consistent with price stability.
Warsh believes the Fed cannot immediately influence short-term inflation trends, which are often driven by price fluctuations in idiosyncratic items like oil, eggs or beef. In his view, what the Federal Reserve can determine is the path of future inflation. The policy decisions the central bank makes are important in that sense, but so is the perception that the Federal Reserve is seen as credible in its inflationary commitment.
Financial markets have changed since Warsh’s first meeting in ways that have reinforced his confidence in his approach. Yields on U.S. government bonds maturing in 10 years or longer have fallen, while measures of inflation expectations based on market activity have eased. At the same time, short-term Treasury yields have risen as traders have piled on bets that the Federal Reserve will raise rates this year, even as energy prices have fallen sharply in anticipation of the end of the war with Iran.
One complication for investors has been Warsh’s refusal to signal where rates might be headed, also known as forward guidance. He declined to present his own forecasts as part of a set of projections released by the Federal Reserve in June. Half of officials projected the central bank would raise rates at least once this year, while the other half estimated the Federal Reserve would keep rates steady or cut them.
This lack of direction has led to widely divergent opinions across Wall Street about what the Federal Reserve might do next. Some see the possibility of a rate hike in the coming months, which they say would help bolster Warsh’s inflation-fighting credentials.
Others think that since inflation is likely to slow in the second half of the year, there is no urgency to adjust rates. Many in this group think Warsh’s previous penchant for rate cuts while running for president hasn’t completely evaporated, either. With a path to reducing borrowing costs almost closed given the current rise in inflation, they believe they will settle for a long hold.
However, the only view with broad consensus is that volatility is likely to increase.
“Forward guidance reduces volatility in the short term but increases it in the long term; eliminating it is the opposite,” said Stephen Miran, who resigned as Fed governor in May and has since rejoined Hudson Bay Capital, a hedge fund. He has also served as one of Trump’s top economic advisers. “Markets don’t know how they will respond,” Miran continued, “but that reduces the chances of getting it wrong sometimes. And getting it wrong sometimes is what can lead to recessions and unnecessary inflation spikes.”
Transformation through the work group
The Fed’s transparency about its future actions will be a key component of the communications task force Warsh has created. The range of issues could include the cadence and structure of monetary policy meetings themselves, the quarterly projections now published by the Federal Reserve, and the timing and content of minutes that are now published approximately three weeks after each meeting, in addition to historical transcripts. The task force could also examine how often officials should speak between meetings and, specifically for Warsh, the frequency of the post-meeting news conference.
One possible line of inquiry is whether there are lessons to be learned from other central banks such as the Bank of England, which Warsh has cited as an effective model for encouraging more candid deliberations during policy meetings and a favorable approach to summarizing and disseminating the minutes of those meetings.
The topics covered by this group and the other four will be unrestricted, reflecting the radical nature of the changes Mr. Warsh is willing to consider. The degree of transformation depends largely on the work group.
Several current and former Fed officials, for example, resist the idea that the central bank needs to radically rethink the data sources it uses. They say the central bank already monitors a host of private sector metrics that Warsh has often highlighted, in addition to official government statistics.
But when it comes to the Fed’s balance sheet, which Warsh has long argued should be smaller, there has already been an internal shift toward the idea that there are mechanisms to reduce it without disrupting markets.
A general concern is whether Warsh will provide task forces with only people willing to affirm his long-held beliefs. Perhaps just as important as who he selects is how Warsh socializes any proposal with his fellow Federal Open Market Committee officials, said William English, a Yale professor and former head of the Federal Reserve’s monetary affairs division.
“Warsh has to do a difficult balancing act,” English said. “If the FOMC feels that its views are not being considered or that people in the working groups are not respected, they may not support the conclusions.”
