Federal Reserve Chairman Kevin Warsh is wasting little time putting his stamp on the nation's central bank, launching what amounts to a top-to-bottom review of how the Federal Reserve operates as he seeks to restore its credibility after the past five years of inflation running above the Fed's 2% target, The New York Times reports.
Just weeks into the job, Warsh has made clear that "price stability" is once again the institution's overriding mission.
At the June Federal Open Market Committee meeting, the Fed stripped much of its customary policy language from its statement, removed individual officials' names and abandoned the practice of signaling where interest rates may be headed next.
‘WE ARE THE FEDERAL RESERVE’
The message from the new Federal Reserve chairman was simple: The Fed's job is to deliver purchasing power balance for Americans.
"We are the Federal Reserve," Warsh wrote in a June 2 letter to the central bank's more than 20,000 employees, pledging greater transparency and "open, cleareyed discussions" as he pursues what he previously described as a needed "regime change" at the institution.
At the center of that effort are five task forces that Warsh believes will determine how effectively the Fed carries out monetary policy.
The reviews will examine how the Fed communicates with financial markets and the public; whether it should continue holding its $6.7 trillion portfolio of Treasury securities and mortgage-backed bonds.
Also on Warsh’s agenda: whether new economic data sources should supplement or replace traditional measures; how artificial intelligence, productivity and labor-market changes should influence policy; and whether the Fed's inflation models remain fit for purpose.
Warsh expects the task forces to complete their work by year-end before policymakers decide which reforms to adopt.
To lead the effort, Warsh has assembled a team that blends outside policy advisers with experienced Fed economists.
His senior advisers include Paul Winfree, a veteran of the first Trump administration, and Hoover Institution fellow Daniel Heil. They will work alongside longtime Federal Reserve economists Daniel Covitz and Eric Engstrom.
The emphasis on price stability also reflects Warsh's determination to rebuild confidence after the Fed, under the leadership of Chairman Jerome Powell during the Biden administration, failed to keep inflation at its stated 2% objective.
Donald Kohn, the former Federal Reserve vice chairman who previously served with Warsh, said the renewed focus on inflation demonstrates the central bank's independence.
AN INDEPENDENT FED
"Price stability is a way of demonstrating independence because you typically associate it with a hawkish tilt to policy," Kohn said, adding that if inflation remains elevated, Warsh could eventually face pressure to raise interest rates.
Before returning to the Fed, Warsh often suggested that inflation near 2% was acceptable. As chairman, however, he has adopted a firmer position that sustained inflation above 2% is inconsistent with true price stability.
Warsh also has refused to provide "forward guidance" about future interest-rate decisions, arguing that markets should respond to incoming economic data rather than predetermined policy signals.
Warsh is signaling that he will be taking a neutral, data-driven approach as the chairman of the Federal Reserve. While Paul Volcker (1979-1987) and Alan Greenspan (1987-2006) mastered this approach to varying degrees, it has not, in fact, been the norm at the Fed for the past two decades.
For a chairman of the Federal Reserve System to commit to being flexible and reliant on economic data rather than a set policy path, is somewhat refreshing.
Warsh’s approach has produced mixed reactions on Wall Street.
Longer-term Treasury yields and market-based inflation expectations have eased, suggesting investors are growing more confident about inflation.
At the same time, traders remain sharply divided over whether the Fed's next move will be another rate increase, a prolonged pause, or eventual rate cuts.
But Wall Street has become more bifurcated, with the Dow, S&P 500 and Nasdaq moving less in lockstep as volatility has returned and investors are reassesing the outlook for rates, inflation and economic growth.
Inside the U.S. central bank, Warsh's changes have generated both optimism and caution.
Stephen Miran, a former Fed governor and former Trump economic adviser, said removing forward guidance may increase day-to-day uncertainty but could reduce the risk of larger policy mistakes over time.
Many staff members appear willing to participate in the review process, although some remain protective of policies adopted under previous leadership.
The simplified policy statements and anonymous internal discussions are intended to encourage more candid debate as the central bank reassesses how it fulfills its mandate.
For investors and businesses alike, Warsh's message is becoming increasingly clear: Restoring confidence in the Federal Reserve begins with restoring confidence that inflation will return — and remain — at 2%.