Summer 2026
—Adrian G. Davies, CFA – President
After eight years under Jerome Powell, the Federal Reserve has a new chairman, Kevin Warsh, and with him comes the possibility of a new monetary regime. We have to consider how the new Fed might change its approach to monetary policy and what the implications of a different approach will be for capital markets. The Federal Open Market Committee (FOMC), responsible for setting monetary policy, is comprised of twelve voting members. If Warsh is to change how monetary policy is set, he will have to sway the other members to his way of thinking, and he may or may not be successful. However, the chairman still has considerable influence over the agenda and how the Fed is run.
Since becoming chairman, Warsh caught investors off guard by expressing his inclination to raise interest rates. Having been appointed by President Trump and with Trump being such an outspoken advocate of cutting rates, people assumed Warsh would be another official along the lines of Stephen Miran, Trump’s prior Fed board appointee, in supporting dramatic rate cuts. Warsh took the opposite tack from Miran, committing to reduce inflation—the implication being he would advocate raising rates if necessary to do so. By defying fears that his Federal Reserve would be subservient to White House policy, Warsh instantly won back some supporters. He believes that in order for the Fed to maintain credibility, it needs to bring inflation back down to its 2% target, which it has been above for the past five years. Fed watchers are still trying to figure out how the two competing objectives of reining in inflation and stimulating economic growth will balance out in practice, but a true measure of the new Fed’s priorities won’t come until we see how it responds to the next recession or financial panic.
Warsh has suggested that prior Federal Reserve administrations have been too vocal about their thoughts on monetary policy. To Warsh’s thinking, the Federal Reserve should communicate less, leaving more room for capital market participants to come to their own independent conclusions about where monetary policy should go. More independent market expectations could then guide how Fed officials should think about the economic outlook and monetary policy. Fed officials have long listened to the markets and will continue to interpret what the market is saying about the economy and monetary policy going forward. But there are reasons to doubt that less communication will result in better policy.
Markets will continue to have some implicit expectation of what they anticipate the Fed will do, whether the Fed gives explicit guidance or not. The outlook for inflation is very much dependent on how the Fed manages monetary policy. One can’t have expectations for inflation that are independent from assumptions about how the Fed will manage it. Less communication means greater uncertainty, providing a breeding ground for fear and doubt. Investors won’t maintain confidence the Fed is managing monetary policy appropriately without reassurances and an understanding of officials’ reasoning. Markets would likely jump between concerns inflation will not be controlled and fears of an economic slowdown. Markets will be more volatile. Warsh’s intention may be for the markets to signal whether the greater risks come from inflation or an economic slowdown, but if less confidence and more volatility lead to lower prices overall, it is understandable that most market participants would not be happy about it.
Put It All on the Table
With less information, the markets will just be less informed and they’ll grasp every subtle indication of how policy might change. It’s hard for anyone at the Fed to say anything without market participants gleaning some policy implication from it. When Alan Greenspan was chair of the Federal Reserve, he was known for his obfuscating commentary. Reporters would focus on how much paperwork was stuffed in his briefcase to gauge whether he was going to advocate for a policy change.
At present, Warsh does not want to provide forward guidance, but his intolerance of inflation suggests he is much more willing to raise rates than to lower them—that expectation should be built into market prices until there is evidence to the contrary. The FOMC is jokingly referred to as the “Federal Open Mouth Committee,” as its being outspoken and giving guidance is itself considered a monetary tool. If Fed officials say, “we think monetary policy should be tighter,” markets start to anticipate tighter conditions, and in doing so bring about tighter monetary conditions without the Fed having to change official policy. Warsh may be using this tool when he emphasizes the Fed’s determination to bring inflation down, even as he advocates for less FOMC communications overall.
Warsh is also concerned that the FOMC will feel trapped by forward guidance, obliged to remain on the interest rate path they’vepreviously telegraphed even as economic fundamentals shift. Whether the FOMC members feel limited by prior guidance is a separate issue from how much guidance they give in the first place. The FOMC should have the flexibility to change its mind as circumstances dictate.
We do not think Warsh will limit the ability of other Fed officials to express their own opinions on the economy and policy; rather, he seems likely to limit only what the FOMC produces as “official” forward guidance, while his own tenor as chairman may also influence markets. Even though the cacophony of Fed officials’ disparate voices can be confusing, we appreciate that the running commentary dilutes the importance of any one statement. Each individual opinion carries less sway in a world where no one has perfect foresight and in an economy that is constantly changing. Even if there is a consensus among Fed officials, that consensus is continually evolving in subtle ways. The more outspoken Fed officials are, the more likely markets will efficiently price multifarious possible outcomes, and the more feedback the Fed will receive from markets. We believe the public discourse between the Fed and its critics is a healthy way to arrive at better policy decisions, and it makes sense to get all perspectives out there as part of the public discussion.
Near-Term Policy
We further have some reservations about policy based on the limited commentary Warsh has provided. Warsh’s specific determination to get inflation back to 2.0% may have a “last mile” problem. The Fed’s instruments of monetary policy, primarily managing the effective federal funds rate, have an imprecise impact on the economy and on inflation. It can take one to two years for policy changes to show up in economic statistics, with the economy and inflation impacted by other factors along the way. By showing such determination to get inflation down to 2%, the Fed risks overshooting on the downside—overly restrictive monetary policy wouldn’t just lower inflation, it very well might constrain economic growth in the process. Is Warsh willing to weaken economic growth, or even cause a recession, to get inflation from 3% down to 2 percent? We don’t like inflation, but we hope Warsh will be pragmatic in his intolerance of inflation. What might be more effective at solving the threat of persistent inflation—restraining the federal deficit—is not within Warsh’s purview. Tariffs, war, immigration policy, and the data center buildout have also been contributing to inflation.
In addition to emphasizing the need to bring inflation back down to target, Warsh proposed the establishment of five task forces to take hard looks at Fed policy with regard to communications, its balance sheet, the sources of inflation, the data sources the Fed uses to make decisions, and the impact of AI on productivity. While Warsh may have some strong opinions, we do not believe there is a political agenda behind these task forces. He seems to have a genuine interest in improving Federal Reserve operations. Prior Fed Chairman Powell arrived with his own ambitions to rework how the Fed thought about inflation targeting, managing its balance sheet, and addressing the needs of the American people. Though there may be something to be gained from the exercise, a more skeptical view is that it’s been tried before. The verdict is still out on how Warsh will change the Fed, and the extent to which the changes might affect the markets. The more things change, the more people cite trite French proverbs.