Kevin Warsh puts stamp on Fed with immediate changes to usual routine

By Maria Eloisa Capurro

 

Federal Reserve Chairman Kevin Warsh put his stamp on the US central bank Wednesday with a bevy of changes coming out of his first policy meeting, setting the stage for the wider overhaul of the institution he promised before he took the helm.

 

Right away at 2 pm in Washington, when the Fed announced its decision to leave interest rates unchanged, investors were greeted with a policy statement less than half the usual length. There was also one set of rate projections missing from the central bank’s so-called “dot plot,” which Warsh later explained were his own.

 

The changes underscored the new chairman’s intent to deliver immediately on past criticisms of the practice of offering “forward guidance” on the future path of interest rates. During his nomination hearing, Warsh called out the frequency of public speeches given by Fed officials and argued such rate guidance would constrain the central bank’s actions.

 

“Not only does this suggest that policy guidance is dead, but it is presumably a signal to ensure that markets take Warsh’s ‘reform agenda’ seriously,” Dario Perkins, a managing director at TS Lombard, said Wednesday in a note. “We’ll see what that means later this year. In terms of the policy outlook, Fed watching just got harder.”

 

In a press conference after the meeting, Warsh announced five “task forces” — including one on communications, another on the Fed’s balance sheet, a third on sources of data officials use to guide their decisions, one on productivity and jobs and one on the Fed’s inflation framework.

 

The groups will include outside experts, Warsh said, and be supported by staff. He added that he’s hoping for results by the end of the year.

 

“Scrapping the dot plot is easy – it was designed for an era of permazero rates – but it would be a much bigger challenge to shrink the Fed’s balance sheet, or move to completely new modeling and data sources,” Perkins said. “All the big questions about reform were deferred to year-end.”

 

Investors have wondered about the future of the projections and even post-meeting press conferences — both of which they have learned to rely on — under a Warsh Fed. On Wednesday, the new chairman refrained from committing to taking questions from reporters following policy meetings as a matter of routine.

 

“Press conferences can be a very useful way to communicate with households, businesses,” Warsh said on Wednesday. But “when you have one, you want to make sure you have something important to say.”