Kevin M. Warsh is no stranger to delicate balancing acts, having helped formulate the Federal Reserve’s response to the global financial crisis as a governor more than a decade ago. But the tightrope that he must now navigate as chairman of the central bank is particularly precarious.
Mr. Warsh, just weeks into his tenure at the helm of the Fed, has inherited a multitude of economic challenges. A deal has been struck to end the war with Iran, but the energy shock caused by months of tension has lifted inflation to the highest level in three years. Officials at the central bank appear at odds over the need to more openly consider raising interest rates. And uncertainty over what message Mr. Warsh, who has called for regime change at the Fed, will send at his first news conference on Wednesday has kept financial markets on edge.
A decision by Mr. Warsh to downplay price pressures and talk up rate cuts would generate significant pushback from several of his new colleagues. It would also raise questions about his commitment to eventually returning inflation to the Fed’s 2 percent target. Talking tough on inflation and keeping open the option of rate increases would help to burnish his credibility but risk angering President Trump, who has not wavered in his desire for lower interest rates.
Mr. Warsh’s pledge to recast how the Fed communicates adds yet another complication. He thinks policymakers should speak less frequently and resist providing signals about what the central bank might do next with rates. This so-called forward guidance boxes the Fed in, Mr. Warsh has argued, making it harder for central bankers to pivot if necessary.
Mr. Warsh will do his best on Wednesday to avoid providing a steer in either direction — an approach that risks injecting an added dose of volatility into markets already bracing for a rate increase around year-end.
“Just given the novelty of the moment, because it’s Warsh’s first press conference, there’s really a lot of scope for what you might call a ‘market misinterpretation’ of his message,” said Kris Dawsey, head of economic research at the D.E. Shaw Group, a hedge fund. “It’s going to take some time for the market to really get calibrated on his communications.”
Warsh’s Debut
The Fed on Wednesday is set to hold rates steady at a range of 3.5 percent to 3.75 percent for a fourth straight meeting.
The policy statement that will accompany the rate decision is likely to scrap what officials have described as an “easing bias,” a stance that suggests a rate reduction is the most plausible next move. It generated significant opposition at the last meeting in April.
What will be hard to immediately discern is if the changes to the statement reflect growing support within the Fed to consider rate increases or if it is simply a byproduct of Mr. Warsh’s longstanding objection to forward guidance.
The statement on Wednesday will be accompanied by the “dot plot,” which aggregates what all 19 policymakers surmise will happen to rates over the coming years. The central bank also publishes what it expects to happen to inflation, unemployment and growth over that same time horizon.
One of Mr. Warsh’s first decisions as chairman revolves around whether he will provide his own projections. Opting out of the process would align with his past criticism of the dot plot and his vow to lead a “reform-oriented” Fed. It would also help to shift the focus away from what Ellen Meade, who was a senior adviser to the Fed’s board of governors until 2021 and is now a professor at Duke University, described as the “ridiculousness of microscoping the dots.”
But there could be drawbacks. “To not do so would look like a spiteful dissent against his own committee,” said Michael Feroli, chief U.S. economist at J.P. Morgan.
It is this group of policymakers that Mr. Warsh will need to persuade if he is to make progress on the changes he wants to enact, including shrinking the Fed’s $6.7 trillion portfolio of government bonds and mortgage-backed securities.
Modifications to the cadence or the content of what the Fed publishes in terms of officials’ forecasts do not require final approval by the committee, said Kurt Lewis, who served as a senior adviser to Jerome H. Powell while he was Fed chair.
But Mr. Lewis stressed that making these changes unilaterally would be a break with tradition. In the past, such alterations have occurred only after extensive deliberation until a consensus was reached, even if the support was not unanimous in the end. That was the case in 2012 when the Fed began publishing officials’ rate projections.
With or without Mr. Warsh’s forecast on Wednesday, most officials are poised to scale back their expectations for rate cuts from estimates three months ago. As a result, the median estimate is expected to at a minimum show no cuts by year-end rather than the quarter-point reduction that was previously forecast. A number of officials are likely to pencil in a rate increase, reflecting what is expected to be a significant revision higher in the inflation forecast.
High Bar for a Hike
Still, the case for an immediate rate increase is not obvious.
Prices for goods and services have risen sharply since the onset of the war with Iran. But the effect so far on “core” inflation, which strips out volatile food and energy prices, has been more subdued, suggesting that the Middle East conflict has not yet caused significant spillover. In May, core inflation rose just 0.2 percent, according to the latest Consumer Price Index report, or 2.9 percent from the same time last year.
The announcement of a truce on Sunday, and the expected resumption of shipping activity through the crucial Strait of Hormuz, has had an immediate effect on energy markets. The price of Brent crude, the global benchmark for oil, fell to a roughly three-month low of $83 a barrel on Monday. Gasoline prices tend to trail fluctuations by a few days.
The labor market, despite strengthening in recent months, is also not a source of inflation, said Richard Clarida, a former Fed vice chair who is now a global economic adviser at the investment giant PIMCO. Unemployment is stable, businesses are hiring at a faster pace and some workers are getting raises, although the bulk of those wage gains has been wiped out by the recent bout of inflation. All of this has occurred as overall productivity has picked up, easing pressure on employers.
“I continue to think that the bar for a rate hike is high, but obviously not insurmountable,” Mr. Clarida said.
That would quickly change if there were signs that Americans were beginning to lose faith in the Fed’s eventually returning inflation to 2 percent — a growing risk in light of recent shocks.
Even before the war with Iran, progress toward that target had stalled. Mr. Trump’s tariffs had driven up prices, while costs for services like hospitality and transportation stayed unexpectedly high.
Expenses related to the boom in artificial intelligence have soared as well, leading to “inflation straight out of Econ 101 with demand exceeding supply,” David Seif, an economist at Nomura, said. Mr. Warsh has argued that the proliferation of A.I. will be “structurally disinflationary” and in turn carve out space for the Fed to cut rates. But his new colleagues appear highly skeptical about that rationale against the current backdrop.
A New Approach
For Mr. Warsh, the Fed’s focus should be trained on big, fundamental questions such as how A.I. might transform the economy, and filtering economic data through that kind of lens rather than getting bogged down in debates about what could happen to rates in the next six weeks.
“There’s a little bit of an imbalance of focusing so much on the bumps and wiggles from month to month that are very hard to predict and are pretty much noise filled,” said Randall S. Kroszner, a University of Chicago economist who served as a governor at the central bank alongside Mr. Warsh.
That emphasis, Mr. Warsh has argued, has contributed to a cacophony of opinions from Fed officials that often results in mixed signals and miscalibrated policy settings.
But it is improbable that Mr. Warsh will be able to significantly curtail how much other policymakers are speaking, although he will have the latitude to shape the substance of what they are debating.
Officials will also have even greater incentive to speak out if they do not feel that Mr. Warsh is representing the committee’s view at the news conferences held after each of the eight policy meetings a year. At his confirmation hearing, Mr. Warsh noted that, legally, the central bank did not need to have as many meetings, but stopped short of endorsing any reduction.
Mr. Lewis, Mr. Powell’s former adviser, who is now the head of central bank policy at the investment bank Piper Sandler, warned that markets could seize up if Mr. Warsh wound back the Fed’s communications too significantly and opted to skirt specifics at Wednesday’s news conference.
“Less communication is not necessarily less information, but if it is legitimately meaningfully less information, you should expect there to be a higher uncertainty about how policy works and therefore greater volatility,” Mr. Lewis said.
