Warsh Era Begins

In a widely expected decision, the Federal Open Market Committee (FOMC) held the line on interest rates at new Fed chair Kevin Warsh’s first meeting on June 16 and 17. The federal funds rate target remains at 3.5 percent to 3.75 percent, where it has stood since late last year.

The decision is being described as a “hawkish hold” for several reasons. The post-meeting statement did not include language suggesting a bias toward future rate cuts that had been included in FOMC communiques in the recent past. At the same time, the committee’s quarterly Summary of Economic Projections released in conjunction with the rate decision implies a higher federal funds rate by the end of the year than it is now.

Warsh himself emphasized the importance of price stability during his post-meeting press conference. This would suggest future rate increases are quite likely should inflation not fall quickly.

Meanwhile, there are signs of how Warsh intends to guide the Fed. The statement released following the FOMC meeting was notably shorter than in the past, with minimal commentary on the economic outlook, fewer qualitative judgments, and no explicit signaling of future policy moves.

The sidelining of “forward guidance” is in line with Warsh’s view that it offers little value. It is also in line with his broader initiative to reform the Fed’s operating framework to more effectively pursue the organization’s mandate.

The initiative will examine such areas as the Fed’s approach to communications, how it uses its balance sheet, collects and analyzes data, understands the impact of artificial intelligence, and defines and pursues its inflation target.

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