On the evening of 16 June, after the first day of his first policy meeting As Chairman of the Federal Reserve, Kevin Warsh sat down to dinner with the 18 officials who set interest rates with him. Gathered around a rectangular table, he announced his plan: Five panels of external experts Will spend the next few months examining how the Fed reads the economy and explains itself.
According to multiple people familiar with the dinner, Governor Christopher Waller, a former economics professor known for saying what others shouldn’t say, put Warsh on the spot. He asked, what does all this mean? He said, tell me who you’re including in these groups, and I’ll tell you what they’ll say. There weren’t any brilliant ideas that everyone somehow missed.
The dinner was an early indication of the central tension of Wersh’s presidency. she is determined To remake the Fed And convinced that he could not wait. Last year, Wersh convinced the most rate-cutting president in modern memory to hand over the central bank to him, despite his long record of worrying about inflation. Now he faces a trickier sell: convincing his colleagues to abandon the intellectual habits of the economics profession that he believes have led it astray.
The Fed will meet again this week an outcome that is unusually uncertain. Many expected this to keep rates stable, but fears of renewed inflation have caused a surprise increase. One reason why it’s so hard to say is Warsh’s signature initial move on Fed reform: He’s saying little — about the economy, about where policy is headed, about his own thinking — and that silence is creating its own tension.
Last month’s dinner exchange was, in a sense, exactly what Warsh says he wants: a “good family fight,” a phrase he uses often, with outcomes that haven’t been decided in advance. Waller obliged, hinting that Warsh was importing outside authority to confirm long-held ideas and present them as discoveries.
Varsh is brimming with confidence. His initial verdict, delivered to MPs this month: “In six weeks we have, I think, brought about a huge shift in new thinking.” The 18 governors and Reserve Bank presidents who, along with Warsh, make up the interest rate-setting committee have “given me an incredibly warm welcome”, he said. The culture he wants to establish is “resonating. I hear it in the hallways. I hear it in the cafeteria.”
Some of that warmth is his work. Colleagues describe a talent for making people feel valued that is successful even when they see it coming.
work force
Five Fed task forces – on communications, its inflation framework, and its asset holdings, among others – are meant to reopen questions that Warsh believes central bankers and the economics profession have stopped asking. The 15 people chosen to lead him include a Nobel laureate, former central bankers and business executives, and have been praised even by skeptics.
Warsh says the reviews are not designed to impose anything and decisions will be left up to the committee. The Fed has traditionally been reluctant to have outsiders do this work, and when it does it moves slowly.
James Bullard, who ran the St. Louis Fed from 2008 to 2023, said Warsh is right. Bringing in trusted outsiders to gather input and report back can help you build support for change in any organization, he said: “I think he’s right.”
Committee members have welcomed the task forces with a mixture of enthusiasm and reservation. There is real interest in revisiting issues like balance sheet and communications that the Fed has put on hold. There are also doubts about whether Warsh’s ambitious timeline and range of topics will allow the kind of deliberations that a committee of this size needs to reach consensus.
Warsh, governor of the Fed from 2006 to 2011, has argued for more than a decade that the Fed’s forecasts produce analogies and that by the time policymakers look at them, their data are out of date. In a speech to economists in 2016, he questioned the accuracy of the Fed’s claims in measuring inflation. Following an external review of the Bank of England’s operations in 2014, Warsh lamented how the Fed’s decision-day discussions had become a stilted recitation of prepared remarks – a change that followed the Fed’s agreement in 1993 to publish verbatim transcripts.
In front of lawmakers, he repeatedly returned to the same figure — 63 months in which inflation ran above the Fed’s 2% target — to explain why there was such a need for re-examination. Implication: One should not defend the status quo.
The executives Warsh needs to convince were in the room for all or some of those 63 months. Some view his record more generously, and said early last year that inflation was returning close to target before tariffs and then the war in the Middle East created new pressures.
silence
The most noticeable change in Warsh’s first two months – which required no task force or vote – came when a senator unsuccessfully attempted to use his five-minute questioning to convict Warsh about his approach.
Sen. John Kennedy (R., La.) told Warsh his policy options – hold, hike or cut – before asking how he would decide whether today’s inflation was temporary or permanent. Warsh replied, “You use five task forces to approach big and difficult questions, not try to paper over policies that have not proven successful.”
He has said almost nothing about how the Fed understands the shocks to the economy now, or how policy should respond. Nor has he been much forthcoming in private: According to people who have spoken to him, officials who sat in on his first meetings left without a clear understanding of how he would approach further negotiations. And where his colleagues describe a trade-off, at least in the short term, between fighting inflation and protecting jobs, Warsh denies that is the case.
John Faust, an adviser to the last three Fed chairmen, said the task force could nudge the Fed toward a number of changes — a modest reduction in its asset holdings, or retiring officials’ quarterly interest rate projections — “not a big deal by any means,” compared to a “more radical” move to respond to what the Fed sees.
For Warsh, saying less is a virtue. This protects the decision of the committee. If policymakers issue a forecast, they start giving credit to evidence that confirms it and dismissing evidence that doesn’t. He also believes a calm Fed gets a clearer picture of what investors think about the economy rather than hearing echoes of its own guidance. “Investors are already upset with me that somehow I’m not giving them all the information that they got before,” he told lawmakers. “My message to them is, ‘Play ball, don’t play the Fed.’
Michael Gapen, Morgan Stanley’s chief US economist, said this premise is not correct. “It’s a stretch to think that by not commenting on the data, the market will assess the data” with no guesses on the Fed’s interpretation, he said.
Bullard said Warsh should avoid raising his hand. He distinguished between explaining how the Fed would respond to different scenarios, which he considers valuable, and hinting very strongly at a specific move.
Four weeks after the dinner, Waller publicly criticized the intemperate approach. “In all my years as an economist, I have never seen a single theory that says you make people’s lives better or markets work better if you don’t tell people what you’re thinking,” he told a gathering of economists in New York this month. Waller, an appointee of President Trump, was a finalist for the job won by Warsh.
William English, former director of the Fed’s Monetary Affairs Division, is skeptical that this approach can last long. A chair who avoids discussing viewpoints cannot explain the committee’s decisions and hands it a tool to operate. “Chair Wersch will find at some point he just has to talk about the outlook,” he said.
That moment could come Wednesday, when Warsh raises questions after a decision the market couldn’t confidently predict. If the Fed raises rates without saying how far it intends to go, investors could see a series of price increases the committee does not intend. English said the measure would require Warsh to break his silence and explain where he thinks things are headed, indicating that a minor adjustment was more likely than an open-ended hiking expedition.
Holding invites a different challenge. Warsh has spent two months telling the country that the Fed will not tolerate inflation exceeding its target. The decision to wait, without any explanation of what would motivate the committee to take action, raises the question of whether rhetoric will ever match action. Waller expressed the concern clearly this month: “Keeping a tight lid on inflation until it melts before our squinting eyes is no alternative.”
Write to Nick Timiraos here Nick.Timiraos@wsj.com
