The Federal Reserve is a sprawling bureaucracy, averse to change. With that in mind, the latest FOMC meeting and press conference - the first under new Fed Chair Kevin Warsh - came as a pleasant surprise.
The Fed held its target for the federal funds rate at 3.5% to 3.75%. While that decision itself was routine (markets had treated it as a near-certainty), the circumstances were anything but. The post-meeting statement was among the shortest in decades; the forward guidance language that long told markets what to expect was gone, and Warsh declined to submit his own forecasts for the Summary of Economic Projections (SEP).
Warsh also announced five task forces to review the Fed's communications, balance sheet, inflation framework, data and productivity. After half a decade in which the Fed has repeatedly missed its 2% inflation target, a chairman this determined to operate differently and implement regime change is an encouraging development.
Warsh described the meeting as embodying the best of the Fed's traditions - "rigorous debate, open-mindedness, commitment to mission, responsibility and accountability for performance" - all of which, he said, "add up to one thing: Getting monetary policy right."
If these served as a statement of principles, Warsh is right and deserves full support. Getting monetary policy right, and being accountable for the results, is exactly what the Fed has failed to do since the pandemic, and a chair who places it at the center of his agenda is starting in the right place.
That focus is especially reassuring given the politics surrounding the appointment. Warsh is President Donald Trump's pick, and many assumed he would deliver the rate cuts the White House has been demanding for more than a year. Instead, Warsh reasserted the hawkish stance he's held throughout his career.
With U.S. inflation running hot, the decision this week to hold rates settles little on its own. But everything around it pointed the same way: a hawkish turn in the committee's rate projections, with nine of the 18 policymakers who submitted forecasts to the SEP now expecting a hike this year, and a forceful commitment that "the committee will deliver price stability." For anyone worried that the Fed's independence was about to give way to political convenience, this was a welcome answer.
The most valuable thing an independent central bank can do for Trump is bring inflation down.
There is a point in this for the Trump administration as well. The president's greatest political vulnerability is affordability and his disapproval on it runs higher than it did for President Joe Biden. A Fed pressured into cutting rates while prices are still climbing would only deepen that problem. The most valuable thing an independent central bank can do for Trump is bring inflation down, which is precisely what political pressure to cut would undermine.
The specific changes Warsh made are sound on their own terms. The retreat from forward guidance is long overdue. When the Fed commits in advance to a path, fresh data can later force it to choose between honoring a stale signal and setting present policy correctly. For example, last September a data-based approach to monetary policy pointed to steady or even higher rates, but the committee had so firmly telegraphed easing that it could not reverse course from fear of shocking markets. Moreover, these communications often became a source of disruptions themselves, especially under the post-pandemic monetary-policy regime.
Warsh also noted that constant guidance from the Fed mutes useful information from private markets that are often better at assessing prevailing economic conditions. The Fed's recent projections make his case. In March, not one policymaker projected a rate hike for the remainder of the year, even with inflation well above target, while markets had already begun pricing one in. The dots in the most recent SEP projecting rate hikes simply caught up to where markets had been for months. This is the kind of noise Warsh is right to want to quiet.
Warsh's first meeting suggests he understands the Fed's problems clearly.
The rest of the Fed's new agenda runs in the same direction. Warsh voiced openness to private data, a sensible complement to government statistics that arrive late, are heavily revised and crowd out competition and innovation. He has long pressed to shrink the Fed's bloated balance sheet. And his five task forces take up the questions a serious framework review should ask, far more rigorously than the Fed's thin 2025 effort, which is why reopening that review topped our Cato Institute reform agenda published the week Warsh was sworn in.
None of this is a finished product, nor could it be after a single meeting. What will matter is how these commitments are carried out in the months ahead, once the task forces submit reports. The balance sheet is the clearest illustration. Trimming its headline size is worthwhile, but the larger opportunity lies in the operating framework behind it. The FOMC's statement reaffirmed the Fed's commitment to ample reserves, the post-2008 arrangement in which the central bank keeps reserves plentiful and pays banks interest to hold them. Following Warsh's instinct to its natural conclusion would mean ending interest on reserves and allowing banks to trade reserves with one another again, so that a market sets the price of overnight money. That would be a fitting charge for the balance-sheet task force.
Warsh's first meeting suggests he understands the Fed's problems clearly. He came in promising regime change, and his opening statements looked like the first serious move toward reform in decades. For once, I'd bet against the status quo for monetary policy.
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