Kevin Warsh is off to a rocky start just two meetings into his tenure as Fed chair. He has refused to provide a framework for how monetary policy should operate, and he has lost both the hawks and doves on the rest of the Committee. The signal for where rates are going will come from his colleagues.
Kevin Warsh is off to a rocky start just two meetings into his tenure as Fed chair. He began his term when inflation was accelerating after spending the last year pushing dovish arguments and vowing to bring regime change to the Fed. He has declined to share details of his economic outlook –other than saying that AI will be great for America. Perhaps even more perplexing is his refusal to provide any semblance of a framework for how monetary policy should operate other than saying “the Committee will deliver on price stability” while refusing to explain how it will accomplish that. Instead, he has been focused on his task forces appointed to help reform the Fed.
Rather than speculating about whether Warsh is a dove trying to buy time with his task forces in hopes that inflation can come down so he can later cut rates, or a hawk who can “talk tough” on inflation while letting the long-end of the yield curve tighten for him without raising short-term rates, what’s clear is that he has lost both the hawks and doves on the rest of the Committee. In the absence of his leadership, the signal for where rates are going will come from his colleagues.
Warsh’s lack of leadership came to a head at last week’s FOMC press conference. This non-answer is an example of how the press conference went:
Ann Saphir: “I need a little help here too. You've – you've said repeatedly, you have no tolerance for inflation. And yet, we are seeing above target inflation, repeatedly, for five years. And through your term so far. And sure, you have no magic wand, but you have not taken action…. could you explain what you mean by no tolerance for inflation, and what you plan to do about it?”
Warsh: …we are on the job, we will deliver, we are focused like a laser on making sure we can do it. But, the suggestion that we're going to be able to do it with our magic wand is one I want to disabuse you and everyone else of. But the discussion last two days give me more confidence even than I had eight and a half weeks ago, this team that we have at the FOMC, the support that we have from Board staff, and the new hard questions we're asking, we need to resolve those, and as we resolve those questions, get smarter on those, we're going to deliver on the remit.
It’s not as though Warsh had put himself in an impossible position by not pushing for rate hikes last week. After all, a majority of the FOMC’s voting members sided with him, and three members had already dissented in favor of a hike. And while Warsh himself was unable to advance a coherent case for holding rates even as inflation breached the Fed’s 2% target for the 64th month in a row, it’s certainly possible to do so. New York Fed President John Williams recently did just that, arguing that inflationary pressures from tariffs and the energy shock have likely peaked, and that inflation should return to a path back down to the 2% target in the coming months.
While Warsh chose to say nothing, markets spoke: long-end rates moved sharply higher, the dollar weakened, and stocks sold off. Rather than causing disorderly market moves and bond market volatility, why didn’t Warsh just lay out his reasoning around holding rates steady at the July meeting? One might suspect that he doesn’t want to anger the person who appointed him by attributing the current inflationary overshoot to tariffs and the Iran war. As we pointed out during his confirmation process, he has a history of flip-flopping on his views on monetary policy depending on which party occupies the White House. Just recently, the WSJ reported that President Trump had been calling Chair Warsh for counsel on a host of issues unrelated to monetary policy.
Following the July meeting, the financial press grew openly skeptical about articles pointing out that Warsh’s refusal to provide any semblance of a framework for monetary policy is causing distrust amongst his peers and undermining in markets. There have been several articles pointing out that these issues, including an FT report stating that he himself has acknowledged that he's made mistakes since May.
But worst of all, he seems to have lost his colleagues on the FOMC. This was not just a story about the three dissents at the July meeting; after all, those three hawkish members also dissented at Powell’s last meeting in April in favor of removing the easing bias from the FOMC statement. Warsh’s lack of credibility with the rest of the Committee set in as soon as he started the job. The Committee has pushed back on Warsh’s planned reforms, lack of monetary policy communications, and faith in AI productivity growth.
AI-driven Productivity Gains
Warsh has mostly declined to say anything about his economic outlook, with one notable exception: he thinks AI will be great for America, and that the productivity boom will justify lower interest rates. While many of his colleagues are open to the idea that AI-driven productivity could be disinflationary down the road, no one else is on board with the idea that this will happen soon, and most of the Committee sees the near-term effect of the AI boom as pushing up rates as the investment boom spills over into consumer price inflation.
Governor Barr, for example, says that “the AI boom is unlikely to be a reason for lowering policy rates.” Governor Cook, who uses many of her appearances to talk about the economic implications of AI, sees lower interest rates as inflationary in the short-term due to the contribution of investment to aggregate demand. NY Fed President John Williams, one of the FOMC’s most dovish members known for his academic work on the neutral rate of interest, recently argued that increases in trend productivity can push up real interest rates.
Trimmed Mean and Alternative Measures of Inflation
During his confirmation hearings, Chair Warsh stated that he preferred looking at trimmed mean and median inflation measures. As we pointed out at the time, the asymmetric nature of the Dallas Fed’s trimmed mean measure meant that it was inappropriate for capturing inflation dynamics in the current period.. Dallas Fed President Lorie Logan shared the same view, even calling out problems with her own Bank’s inflation measure as early as May.
The backlash against the “trimmed mean” cherry-picking seems to have forced Warsh to back off. At his Congressional testimony in June, he pulled a 180 on the issue, telling the House of Representatives that “I don’t have a preferred measure” and that reporting that he did prefer trimmed mean estimates was wrong.
On Communications
Chair Warsh has long decried the Fed’s communication tactics, arguing that the Fed should communicate less and not rely on forward guidance. While some members are sympathetic to the view that explicit forward guidance is not needed outside of the zero lower bound, the rest of the Committee still believes in communicating their reaction functions. In the absence of Warsh explaining his monetary policy framework, the rest of the Committee has become more outspoken about their own reaction functions. KC Fed President Jeffrey Schmid dedicated an entire section to a recent speech of his outlining why communicating a framework is important for the FOMC. Schmid’s argument was premised on accountability, reducing any doubts of political influence, and the importance of external feedback. The rest of the Committee has not shied away from communicating their outlooks and framework despite Warsh’s absence. Governor Cook, who is typically reserved about her monetary policy positions, has recently given two speeches explaining her framework in detail.
On Markets
After Warsh alluded to markets doing the Fed’s job via higher long end bond yields, St. Louis Fed President Alberto Musalem pushed back, arguing “It’s very important to clearly communicate the reaction function to businesses, households and markets, They need to understand what we’re doing and why we’re doing it in certain situations…Congress gave the FOMC the responsibility to achieve price stability and maximum employment. It did not give that responsibility to markets.” Governor Waller echoed similar points, stating "surprising people is not good…markets should have as much information as possible.”
Governance
Outside of policy disagreements, the rest of the Board has pushed back against his ideas at reforming Fed Governance. When Warsh announced his plan to enlist the five task forces for reform, Governor Waller reportedly asked Warsh, “What’s the point of all this, he asked. Tell me who you’re putting on these groups, he said, and I’ll tell you what they’ll say. There were no brilliant ideas out there that everyone had somehow missed.”
In the conclusion of a recent speech, Lorie Logan felt the need to remind her audience that the Fed operates by committee: “Neither I nor any other single person makes monetary policy on their own in the United States.” Minneapolis Fed President Neel Kashkari echoed similar points:
“The chair of the Federal Reserve has a lot of influence. The chair sets the agenda… But when it comes down to a vote, the chair is one of 12 voters. And so a new chair coming in, whoever the chair is, whatever the environment is, will have to persuade his or her colleagues that this is the best course of action.”
The recent leaks to the press from private deliberations suggest that Warsh is quickly squandering whatever goodwill and leeway his colleagues were allowing him at the beginning of the term. This amount of subversion from the rest of the Committee is highly unusual.
Current FOMC members can only be so direct and public in their pushback against Warsh, but comments by former members provide some more color. Former Cleveland Fed President Loretta Mester said of Warsh’s press conference: “I actually want more from my Fed. I want to feel comfortable that the Fed knows what it is doing. I don’t think it’s sustainable, what he’s doing, in terms of not saying anything.” Contrast that with Mester’s comments just three months ago that Warsh “always has a well-reasoned argument” and “will be a consensus builder.”
The point that critics, including us, are trying to drive home is that markets, businesses, and individuals need to have a clear understanding of the Fed’s framework. Trust and confidence in the institution require transparency about the Fed’s outlook and how they would react to economic conditions when setting policy – especially at a time where trust in our public institutions are eroding. Warsh may think he can get markets to stop thinking about the Fed, but his brief tenure thus far has proven that markets will try.
These issues may not matter now during times like now where conditions are stable, but it is during times of crises where issues can start to propagate. During the last two crises, the Fed was able to act quickly and decisively because its leadership was able to forge a consensus and had developed bipartisan trust. Thus far Chairman Warsh has not demonstrated the ability to win over the trust of his colleagues, markets, and members of Congress from both parties have pushed him to be more clear and transparent on his communications. This is why Jon Faust, who served as an advisor to Chairs Bernanke, Yellen, and Powell, recently stated “there’s damage control to do.” If Chair Warsh wants to be prepared for the next crisis, he needs to work on building trust amongst his peers by laying out his framework – which he can even do without providing forward guidance.