Warsh Wants A 'New Chapter' For The Fed. A Rate Hike Could Come First

Federal Reserve Chairman Kevin Warsh made his debut at the lectern Wednesday after his first meeting at the helm of a central bank that has been buffeted by macroeconomic and political upheaval over the last two years.

While explaining the Board of Governors’ thinking on inflation and unemployment, Warsh also laid out a plan to reassess and reform all facets of the Fed’s operations through five task forces. 

As reporters peppered him with questions about the execution, Warsh offered the same refrain: “We have a task force for that.” 

The Fed’s decision to hold its benchmark rate flat was nearly universally forecast, but Warsh’s comments at the customary postdecision press conference were closely watched as the investment world got its first sense of how he might navigate a choppy financial landscape, rising inflation and President Donald Trump’s continued calls to bring rates down. 

“What we've given markets is a new chapter for the central bank, some fresh thinking,” Warsh said. “What we've given markets, households and businesses is a commitment to ask ourselves hard questions, such that we can deliver on the promises that we've made before.”

Warsh’s plans to shake up the central bank come as inflation runs at more than double the Fed’s target and the labor market is posting job gains that are strong but shallow, concentrated in a handful of sectors while others shed workers. 

The macroeconomic backdrop has effectively erased any hopes for rate relief this year. Nine of the 18 Fed governors who submitted forecasts projected at least one rate hike this year, while eight expect rates to remain flat, and one forecast a 25-basis-point reduction. 

Warsh was the only governor to refrain from making a prediction, on theme with his stance during his press conference that the Fed won’t provide forward-looking guidance.

The shift in sentiment from Fed members came as a shock to Zack Simkins, managing director at private credit firm Vaster. 

“That total was a bit more aggressive than I thought — it's something that I'm definitely going to need to factor into my business,” he said. 

Simkins said he doesn’t expect to have to reprice any loans that are in front of borrowers, but he is rethinking future pricing now that half the central bank governors expect a rate hike this year. 

“The amount of gumption they have towards the direction is what was shocking,” Simkins said. “The direction isn't surprising, because you knew it was a possibility, but the likelihood of it is what's shocking.”

Warsh announced the creation of five task forces, each with a specific focus: Fed communications, the bank's balance sheet, its use of and reliance on existing data sources, productivity and jobs in an era of transformation, and the Fed's inflation framework.

The membership of the task forces hasn’t been finalized — Warsh said he still had “a phone call or two to make before I've nailed down the people” — but they were described as coming from a range of backgrounds, with wide latitude to make recommendations that the board would consider. 

Fed officials already significantly streamlined the statement provided after the vote this month, stripping out details about how Fed governors viewed different aspects of the economy. More changes to the regular releases are coming, Warsh said.

“What’s clear is that today is only the start of what is likely to be a period of transition for the Fed in terms of what they look at, how they communicate and operate,” Jeff Palma, head of multi-asset and macro research at investment manager Cohen & Steers, said in an email.

The task force focused on data is aiming to update the “old-fashioned survey methods” the central bank uses to measure the strength of the economy, Warsh said. The Fed’s datasets are largely backward-looking, which Warsh said was hindering decision-making and its own data reporting. 

“Almost every private company CEO that's running his or her business is doing so with real-time information that isn't subject to much revision, that is telling them what just happened at that very moment,” he said. “What we're really interested in is what's happening right now. What we're less interested in is echoes of history.” 

Warsh was nominated to lead the central bank in January, but he isn’t a newcomer to the Fed. In 2006, at 35, he became the youngest person ever to serve as a Fed governor and went on to take a central role in negotiations with Wall Street banks during the Great Recession. 

He was part of the team that led the Fed’s initial campaign of quantitative easing but resigned in 2011 over a second round of bond buying that amounted to an expansion of the program. After his exit, Warsh became a frequent critic of the central bank and complained about its willingness to make large-scale asset purchases outside of true emergencies.

Warsh leaned hawkish during his previous tenure at the Fed and cited inflation’s upside risks more frequently than the downside presented from the labor market. In the face of today’s high inflation and a relatively strong job market, Warsh has argued that increased productivity driven by the adoption of artificial intelligence could clear the way for rate cuts.

“Today’s meeting delivered exactly what I’ve been expecting from Warsh in this role,” Uma Moriarity, senior investment strategist at CenterSquare Investment Management, said in an email. “He focused on making policy changes with a more proactive approach, as opposed to a data-dependent and reactive one, with an ambitious plan for five task forces to reevaluate how the Fed is fulfilling its mandate.”

During the press conference Wednesday, Warsh signaled that he felt the Fed had lost credibility with Americans by not delivering price stability. Inflation was at 4.2% in May, the highest reading since early 2023. 

“The Fed statement says that inflation is primarily determined by monetary policy. You bet it is. I've said for years inflation is a choice. You bet it is,” Warsh said. “And today I'm announcing that this committee unambiguously and unanimously have decided we are going to deliver on that.”