Federal Reserve Chairman Kevin Warsh, three days after his first Federal Open Market Committee meeting, set up five task forces to rethink Fed communications, the inflation framework, the impact of artificial intelligence, the data the central bank uses to measure the economy and the size and composition of its $6.7 trillion balance sheet. Markets are reading the project as the most comprehensive Fed review in recent memory and one Warsh has framed as a consensus exercise rather than the confrontation his pre-nomination rhetoric suggested.
The contrast is sharp. Last July, in a CNBC interview while he was campaigning for the chair, Warsh called for "regime change" at the Fed and cited a "credibility deficit" caused by "incumbents." This week, after the FOMC voted unanimously to hold rates and Warsh laid out his plan, he praised the meeting as having "exemplified the very best of the Fed's traditions" and said he had been "incredibly impressed" by what he had seen. "What I think we're seeing is regime change, but in a velvet glove," Scott Clemons, chief investment strategist at Brown Brothers Harriman, told CNBC.
The mandate
Each task force, Warsh said, would "start with first principles, ask hard questions, examine current practice, consider alternatives, and ultimately propose next steps for policymaker consideration." The first visible product was the post-meeting statement itself, stripped of what former Cleveland Fed President Loretta Mester called "boilerplate language that really wasn't serving any purpose anymore" — including forward guidance — and reverted to a pre-March 2009 format that opens with the rate decision. "Once a phrase or sentence got in there, it was very difficult to get it out," Mester told CNBC. Likely to follow under Warsh are reviews of the dot plot, the post-meeting news conference, and how the Fed has gauged inflation after running above its 2 percent goal for five years since what BlackRock's Rick Rieder called the "erroneous 'transitory' call in 2021 and 2022."
Why Asia is paying attention
Warsh's inflation review is landing as other central banks publicly grapple with the same question. The Bank of Korea warned on June 17 that record performance bonuses at SK Hynix and Samsung Electronics — under new wage deals carving out 10 percent and 10.5 percent of operating and semiconductor operating profits, respectively — could broaden into wage pressure that lifts inflation above the BOK's 2.7 percent forecast. "Sales have increased significantly in places such as Suwon and luxury goods sections of department stores, and this could gradually spread further," BOK Deputy Governor Lee Jiho said. Shares of Lotte Shopping, Hyundai Department Store and Shinsegae have risen 148 percent, 120 percent and 190 percent this year on the spending. For the Fed, the live question is whether a wage-led overshoot of an inflation goal is transitory or a sign the goal itself needs rethinking.
Counterpoint
The reporting today reflects a single perspective: the financial press reading institutional change favorably. Democratic lawmakers who treated Warsh's "regime change" line as a political broadside at Fed independence had not publicly responded to the task-force announcement by press time. As Mester put it on the broader question of how the Fed should explain its reaction function, "'trust me' is not good communication."