By Howard Schneider
WASHINGTON, June 19 (Reuters) – U.S. Federal Reserve Chairman Kevin Warsh put his stamp on the job fast this week at a debut policy meeting that produced a return to stripped-down, 1990s-style central banking, before this century’s crises put the Fed center-stage in economic management and turned its leader into a consoler-in-chief for Wall Street and Main Street alike.
The question now is whether the reduced role he seeks for the Fed and in effect for himself is compatible with a world grown more complex, a more-intense and polarized information environment, and markets now accustomed to a steady diet of top policymaker commentary.
Whether he intended it, Warsh’s emphasis on inflation in Wednesday’s press conference, without any more-nuanced commentary about what might clear the bar for a rate hike, led investors to conclude an increase was coming soon and begin bidding up bond yields.
The market reaction “was massively amplified by the Warsh press conference that combined a hawkish near single-mandate emphasis on the need to deliver price stability with a total absence of any modulating discussion of the Fed’s strategy or reaction function,” wrote Krishna Guha, a former top communications official at the New York Fed and now vice-chairman and head of economics and central bank strategy at Evercore ISI. “Discussion of the reaction function and strategy…supports more effective central banking,” a main tenet of current central bank practice.
The Fed at Warsh’s first meeting held rates steady in the 3.50%-to-3.75% range where they’ve been since December, announcing it in a spare policy statement reminiscent of those penned in the 1990s by then-Chair Alan Greenspan, famously reluctant to let the public into his thinking. The arc of communications since then has been for the Fed chief to spend less time behind the curtain, and one current communication tool, the “dot plot” of rate projections, on Wednesday showed what Warsh did not want to discuss – policymakers flocking to the likely need for rate hikes this year.
RAISING NEW QUESTIONS
Spare statements also don’t necessarily mean clear ones, and some of the changes raised as many questions as they answered about the Fed’s new era.
Instead of the simple factual statement that “inflation is elevated” used under former Chair Jerome Powell, for example, the first Warsh statement was conditional, saying inflation was elevated “relative to the Committee’s 2% target.” The wording could mean inflation is not considered excessive in an absolute sense. Warsh, while reaffirming the 2% target, also has said the decimal point values don’t matter, hinting at some tolerance of inflation merely near the Fed’s goal.
In place of simply characterizing job growth, low early this year but stronger of late, the new statement makes another comparative turn, saying employment gains had “kept pace with the workforce.” The language seems to sidestep the “curious” balance the Powell Fed saw as it wrestled with how the Trump administration’s immigration crackdown had changed the number of jobs needed to keep the unemployment rate steady. Warsh did not delve into it.
On economic growth overall, the statement highlighted aspects Warsh sees as important to the future and currently booming – productivity and capital investment – without running through the full list of components of gross domestic product including: consumption and the thorny debate about the risks of “K”-shaped gains benefitting the wealthy; net exports and the thorny debate about tariffs; and government spending and the thorny debate about debt.
An assessment of the relative risks to the Fed’s inflation and employment goals was dropped altogether in favor of a final, declarative statement: “The committee will deliver price stability.”
“The statement was a gift” to the new Fed chair, weaving his priorities, including the emphasis on inflation, into a document approved by the Federal Open Market Committee’s first unanimous vote in a year, said Diane Swonk, chief economist and managing director at KPMG US.
FOLLOWING THROUGH
Whether the new style is sustainable will hinge on factors including market reaction over time and perhaps more so how the world evolves, with Fed leaders often finding that firm “first principles” wear thin in a crisis.
Likewise, Warsh announced five task forces geared to Fed reform, with a question mark over whether they “will be agents of regime change or just more commissions to rehash old debates,” wrote JPMorgan Chief Economist Michael Feroli, noting communications reform was discussed last year but ended with a stalemate despite high-level analysis by former Chair Ben Bernanke and deep interest from Powell.
After more than a decade of sharp criticism of the Fed, Warsh likely had to follow through in some fashion after promising he would be “knocking some heads.”
A former governor under Bernanke, he left in 2011 partly in opposition to the Fed’s ongoing bondbuying after the 2007-to-2009 financial crisis. Three of his task forces involve issues – communications, the balance sheet, and the inflation framework – that changed dramatically as a result of that deep recession, the sluggish growth that followed, and the developing political paralysis in Washington that made the Fed arguably the main actor on economic policy.
The COVID-19 pandemic further expanded its role with a multi-trillion-dollar effort to support the economy, and Powell’s center-stage role explaining it in prime-time media appearances designed to reassure worried households and jittery markets.
In suggesting all that might be dialed back, Warsh isn’t just fighting old ghosts. The two other task forces, on productivity and the use of real-time alternative data in policymaking, are issues many in the Fed are grappling with, and research staff have said they’d welcome the exploration.
“There’s so much data floating around in the world with so much ability to process it that there’s got to be some things that we can learn,” Atlanta Fed research director Paula Tkac said in a mid-May interview as Warsh was preparing to take over. The challenge with new methods, one Fed researchers became familiar with during the pandemic when some promising new data sets proved less useful as time passed, is to “understand how it fits with the rest of these measures that we’ve had for longer periods of time.”
(Reporting by Howard Schneider; Editing by Dan Burns and Andrea Ricci)
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