The Federal Reserve held its target range for the federal funds rate at 3.5 to 3.75 percent on Wednesday, at the first meeting of Kevin Warsh’s tenure as Fed chair. The decision itself drew less notice than what came with it: a shorter policy statement, the end of forward guidance, five task forces to review the Fed’s core practices, and a chairman who declined to submit his own interest-rate projection.
Warsh used his debut not to move policy but to signal how much of the Fed’s machinery he means to remake, even as the Federal Open Market Committee raised its inflation outlook and held rates anyway.
In his first press conference at the helm of the Fed, Warsh framed the leadership change as a chance “to review current practices, and to consider whether those practices best meet our objectives.” He named task forces in five areas: the Fed’s communications, its balance sheet, the data it relies on, the effect of new technologies on productivity and jobs, and, most consequentially, its “inflation frameworks.” Each, he said, deserves “a fresh look” that starts from “first principles.” He has begun recruiting members from inside and outside the Fed and expects most of the reviews to conclude by year-end.
The changes were not all prospective. Warsh pointed to the day’s statement, which was visibly shorter and “dispenses with some older language.” Gone too was forward guidance, which the FOMC judged “not well-suited to the current policy conjuncture.” And in a break with the practice of every recent chair, Warsh declined to submit his own dot for the path of interest rates in the Summary of Economic Projections, saying he had “refrained from offering any projections of my own — consistent with my long-held views on the SEP, at least as currently structured.”
Warsh conceded that inflation has run “well ahead” of the Fed’s two-percent goal for “more than five years,” and that “persistently high prices are a burden for the American people.” The FOMC’s own projections made the point sharper: the median projection for total PCE inflation this year jumped to 3.6 percent, from 2.7 percent in the March SEP, with core inflation marked up to 3.3 percent from 2.7 percent.
A five-year overshoot, an inflation projection revised up nearly a full point in three months, and a decision to hold rates steady anyway are the conditions under which a central bank falls behind the curve, as the Fed did when it dismissed the last inflation surge as transitory. Warsh’s decision to put the Fed’s inflation framework back under review is a welcome change after years in which the Fed has failed to return inflation to its two-percent target. If anything, the fact that the review begins as the inflation outlook is being revised upward only reinforces the case for reexamining a framework that has yet to deliver price stability in the post-pandemic era.
With forward guidance gone, the dot plot is now the committee’s clearest signal of where rates are headed, and its message is that the next move is more likely to be a hike than a cut.
The median participant expects the federal funds rate — the interest rate the Fed targets — to end this year at 3.8 percent and next year at 3.6 percent, up from 3.4 percent and 3.1 percent, respectively, in the March dot plot. Among the eighteen members who submitted projections (Warsh abstained), nine see the rate above its current range by year-end, six see it at 4.125 percent or higher, and only one sees a cut. Warsh discounted the dots, noting that FOMC members had submitted them tentatively and did not feel bound by them. Markets, he argued, should price incoming data rather than parse the Fed’s signals.
The projections also undercut the case for treating the inflation problem as the byproduct of an energy shock from the Iran conflict. A genuine adverse supply shock would be expected to push inflation up while weighing more heavily on real activity. But the FOMC’s growth projection slipped only modestly, to 2.2 percent from 2.4 percent, while unemployment held near 4.3 percent. Nor was the inflation revision confined to headline inflation, where oil prices would show up most directly. Core inflation, which excludes food and energy, was revised up to 3.3 percent from 2.7 percent. Energy shocks can pass through to core prices indirectly, through freight, production, and input costs, but they do not easily explain an inflation outlook revised upward across both headline and core measures while the economy remains near trend. The broader the price pressure, the less convincing it becomes to treat the problem as a relative-price shock rather than an aggregate-demand problem.
Warsh drew the right distinction between the Fed’s limited control over particular prices, such as oil or eggs, and its responsibility to prevent such shocks from broadening into general inflation. That distinction is correct, which makes the case for leaving rates unchanged considerably harder to understand.
Warsh has long argued that inflation is a choice the central bank can control, and he insisted the FOMC is now “unambiguous and unanimous” that it “will deliver price stability.” Yet it chose to hold while projecting headline inflation more than 150 basis points above target and a rate path that would bring inflation back to target only gradually. Pressed on why, if credibility is earned by delivering on commitments, the Fed would not tighten or at least signal it, Warsh pointed to the next meeting, six weeks away.
Warsh inherited both the inflation overshoot and a committee still divided over how to respond. The test is whether the resolve he voiced shows up in the rate decisions to come.
Even so, Warsh has given more reason for optimism than the Fed has offered in years. A chairman who calls inflation a monetary phenomenon, rejects the idea that the Fed must accept higher prices to secure more jobs, and wants to reexamine the inflation framework from first principles is saying what the institution has long needed to hear.
The next step is to match that diagnosis with a better target. A nominal spending target would reject the false choice Warsh disavows by anchoring aggregate demand directly, rather than forcing the Fed to explain persistent inflation as a series of one-time price shocks. The danger is that the Fed spends too long rethinking its framework while inflation remains above target. Warsh appears to understand the problem. The question now is whether he can move the institution quickly enough to solve it.
