WASHINGTON: Federal Reserve Chairman Kevin Warsh will convene his first meeting as U.S. central bank chief on Tuesday and hold a press conference the following day, as he begins what he has promised will be an agenda of broad change at the monetary policy authority. The Fed is widely expected to leave interest rates unchanged at the end of the June 16-17 gathering, so investors will be parsing the language in its policy statement, updated policymaker projections and Warsh’s own remarks for other signs of the central bank’s direction. Warsh’s agenda may take time to evolve, but based on comments and writing prior to returning to the Fed some 15 years after serving on its Board of Governors, it could be extensive. Here’s a look:
THE POLICY STATEMENT
Warsh prefers a less-is-more approach to the policy statement issued at the end of each Fed meeting, arguing that “forward guidance” on whether interest rates will fall or rise ties the central bank’s hands if economic conditions change. He agrees such guidance has its place – in a crisis, for example, if the Fed wants to reassure the public or amplify the impact of policy moves – but for normal times he is no fan. The statement is one area where Warsh’s preferences could be quickly felt. Under his predecessor, Jerome Powell, who remains a Fed governor, the statements had already been pared back, but the last one still referenced “additional adjustments” to interest rates, the central bank’s code for possible cuts. Removing that language could serve two purposes: Trimming guidance as Warsh would like but also accommodating the fact that rate hikes may be needed this year.
COMMUNICATIONS
Warsh also dislikes much about the Fed’s current approach to its public communications. From the press conferences the Fed chief now holds after each meeting to the extensive quarterly Summary of Economic Projections and the many speeches given by other governors and reserve bank presidents, he feels the central bank talks too much, strays into issues it shouldn’t, and adds more confusion than clarity to the public debate.
Extensive reform may be difficult. The Fed looked at changes to the SEP last year – including making it more detailed – and could not reach consensus. Curbing how frequently Warsh’s colleagues make speeches or give media interviews would require a difficult change at an institution that has moved toward increased transparency and would run counter to current thinking about how monetary policy works best. There are things Warsh could do differently on his own, and that may start to be apparent in his first post-meeting press conference, which will start at 2:30 p.m. EDT (1830 GMT) on Wednesday, the same time slot that Powell and former Fed Chair Janet Yellen used for those events. Warsh has no obligation to continue the media sessions – before Powell, they were only done quarterly and longtime Fed chief Alan Greenspan did not do them at all – and they could be shorter or more limited in scope.
OUTLOOK AND DATA
Warsh faces an immediate economic dilemma in the form of President Donald Trump’s expectations for eventual rate cuts set against a backdrop in which data suggests rate hikes may be needed. Recent strong hiring has eased fears about the job market, and with inflation lodged well above the Fed’s 2% target, many of his colleagues have grown hawkish.
Some issues that Warsh raised before his nomination for the top Fed job could pave the way for rate cuts even now – the expectation that artificial intelligence is about to lower the cost of production or that his promised drive for a financially smaller central bank would lead to easier financial conditions at the same level of inflation.
Yet conditioning current monetary policy on such forward-looking ideas comes close to the sort of guidance Warsh says he dislikes, and would also be risky if the world doesn’t turn out as he anticipates. Recent data, for example, show aspects of the AI buildout raising some prices, at least for now.
How Warsh reconciles it all in his press conference could offer clues about his plans as he tries to square shorter-term data that may argue for rate hikes with a longer-term narrative about structural changes in the economy that might allow for lower borrowing costs. He has also raised measurement issues about inflation that could come into play as he encourages a review of the data the Fed relies on.
FRAMEWORK AND THE INFLATION TARGET
In his Senate confirmation hearing, Warsh did not explicitly restate support for the Fed’s 2% inflation target, but criticized central bankers who, as he put it, fixate “to the right of the decimal point,” hinting at some tolerance of inflation that’s around 2% even if it’s not quite there.
Warsh’s colleagues see risk in talking too loosely about the 2% target, arguing that weakened perceptions of the Fed’s commitment to meeting their stated goal might shift public psychology in ways that would push inflation higher. What Warsh says about the inflation target, the role of expectations, and the relative importance of the Fed’s twin mandates of price stability and maximum employment will be another sign of just how different he is from a group of sitting policymakers he worries have been overrun by “groupthink.”
BALANCE SHEET AND REGULATORY REFORM
As a Fed governor and then a fellow at Stanford University’s Hoover Institution, Warsh was a harsh critic of Fed asset purchases for anything other than broad market failure, and has made reducing the central bank’s “footprint” a major calling card.
He may get some help from regulatory changes pursued by Fed Vice Chair for Supervision Michelle Bowman that would decrease what banks require in overnight reserves, a key driver of the Fed’s $6.73 trillion balance sheet.
But it may be a long, slow slog, with little to show at the end – absent a wrenching and difficult change in how the Fed maintains its policy rate. There’s openness to working on it, and agreement that the central bank, for example, needn’t hold mortgage-backed securities and that its government bond holdings should at least match the maturity structure of the Treasuries market.
On size alone, however, there’s no consensus, and more than a few Fed policymakers who argue it doesn’t matter much.
