Warsh’s Fed regime change is moving ahead, and meeting resistance

Chairman Kevin Warsh likes to measure his tenure as Federal Reserve chairman in days, and 127 days in, his promise of regime change is taking shape. He’s moving fast on some easy and very visible items directly in his control but is constrained from making bigger changes by the state of the economy and by his colleagues on the Fed.

Warsh has quickly put his stamp on the way the Fed communicates. Some changes appear cosmetic, such as shortening the news conference that occurs after meetings of the Fed’s rate-setting Federal Open Market Committee and changing the seating arrangements for reporters to be alphabetical by news organization. But those cosmetic changes hide a more profound shift: the way Warsh thinks about and communicates his views on monetary policy represents a sharp break from his predecessors.

Warsh hasn’t been able to act yet on one of his key priorities, cutting the Fed’s balance sheet, in part because inflation is a more pressing concern. And he constrained himself on other priorities by appointing five task forces to examine Fed practices. They are supposed to report back early next year.

Last week’s unanimous quarter-point interest rate increase and any ones that follow will likely be the highlights of Warsh’s early tenure in a move that answered his critics’ concern about his independence from President Donald Trump. Based on how he has explained his way of thinking about markets and the economy, Warsh seems likely to support additional hikes if inflation remains a problem. Last week’s increase was the first since 2023.

For a Fed chairman who prides himself on taking signals from the market, Wall Street is sending a strong one. The 2-year Treasury yield traded nearly a full percentage point above the effective federal funds rate on Wednesday, indicating traders expect more rate increases. It’s the largest spread of the 2-year over the funds rate since 2023. Inflation is running at 3.7% as measured by the Fed’s preferred personal consumption expenditures indicator in July, the most recent reading. It has been above the central bank’s 2% target for more than 5½ years.

Fed chairs for years described the funds rate as either accommodative, neutral or restrictive. But asked at his Sept. 16 news conference where the Fed was relative to neutral, Warsh dismissed the very premise. He responded that the concept is “useful academically” but had no bearing on the decision to hike.

The comments caused consternation among some in the central banking world who had been accustomed to thinking of the funds rate in those terms.

“What is odd is that Warsh framed the decision as ‘removing a dose of accommodation’ and then distanced himself from the concept that defines accommodation,” wrote economist Claudia Sahm. “But now that the Fed has hiked, how will he judge whether to hike again, and when to stop?”

Warsh’s critics argued after his vague performance in July that he lacked credibility because he hadn’t articulated a consistent theory for…