Analysis: Warsh is learning to wield the Fed's power without showing his hand - CNBC
Kevin Warsh is done proving himself.
The Federal Reserve chairman's press conference Wednesday was sharply different from his early appearances in the job, when he often seemed backed into a corner. He's shown he is willing to let the markets guess where he is going — at least to a point. And he has started using his authority to reshape the institution.
Warsh was appointed by a president who said cutting interest rates was a litmus test for his choice for Fed chair. When the Federal Open Market Committee opted to hold rates flat in June and July, even with inflation well above the Fed's 2% target, a swarm of commentators questioned the new chairman's credibility. The FOMC's subsequent decision in September to raise rates came with such a hawkish reading of the economy by Warsh that the markets swung sharply in the opposite direction. Investors thought the Fed might be locked into a rate hike this week until a pair of top officials came out and appeared to deliberately temper market expectations.
This week, Warsh put all that behind him. He disavowed any expectation that the Fed is on a set course: "If we had a firm conclusion about the conduct of monetary policy, we'd announce it to much fanfare today," he said.
But Warsh also gave a strong signal that his current lean is toward higher rates. "While overall financial conditions are tighter, I'm unwilling and unable to call them tight," he said.
He was preserving his options while laying the intellectual groundwork for a hike in December, should inflation remain stubborn.
Warsh declined to confirm the widespread assumption in the markets that the officials who had talked down the markets had done so at his direction. Fed insiders have said that the Fed's vice chairs usually coordinate messaging with the chair.
"To suggest somehow that I am some kind of all-knowing person sending messages out, that's not the committee of the FOMC that I know," Warsh said. And yet the market got the message that the Fed wouldn't hike this week. If Warsh wants to give otherwise taboo forward guidance through his lieutenants, he now has plausible deniability.
This is Warsh's MO: He is intellectually flexible and highly focused on achieving his goals.
For instance, one of the goals of the task forces he has assembled to kick-start policy changes is to change the way the Fed measures inflation. But that was impossible while his commitment to fighting it was in question. September's rate hike does a lot to answer the skeptics who said he wasn't serious about slowing price increases, and he is willing to deliver more rate increases, if necessary.
"If you think that we're tolerating some inflation target somewhere in the twos, let us disabuse you of it," Warsh said Wednesday. The target is 2% flat. His remarks are a recipe for higher rates as long as the economy stays strong.
Warsh and the FOMC will have a raft of new data before the next meeting, in December, to make their case. That could, alternatively, help him make the case that productivity is rising, allowing for more growth without inflation.
Meanwhile, Warsh's other changes at the Fed are starting to take effect. He announced a plan Wednesday to reduce the number of times the FOMC is scheduled to vote on interest rates over the next two years. The Fed will keep meeting eight times a year, but will skip a vote on whether to change rates at one meeting in 2027 and two in 2028. That move has the effect of devaluing a good chunk of Fedspeak. The market won't pay much mind to a marginal regional Fed president's comments when they come as much as three months ahead of a rate decision. Regional presidents also get one fewer scheduled vote in their year-long rotations as decision-makers on the FOMC.
The Fed chairman retains the authority to call an impromptu meeting at any time should he see the need to change rates.
But there are risks to Warsh's way of doing business, especially as he recedes further behind the curtain. The advocates for Fed transparency believe that sunlight adds more rigor to officials' arguments.
That could already be a problem, said Robert Sockin, chief U.S. economist at asset manager PGIM. He is in the camp that thinks inflation is running too hot to justify the Fed's decision not to raise rates this week.
"While more data is always better, Warsh did not sufficiently explain why this backdrop did not justify a rate increase, particularly given his comment that while he thinks financial conditions have tightened, he would not say they are tight," Sockin said.
It was a "policy mistake" to hold, "and a gradual Fed likely means one that has to hike higher, mechanically raising recession risk," Sockin said.
The full consequences of Warsh's approach may not become clear for months. That gives him room to maneuver as he reshapes the Fed. But it also means the consequences of waiting to tighten may not become apparent until it's too late.
