If there were any lingering questions over whether new Federal Reserve chairman Kevin Warsh would bring changes to the central bank, his first press conference answered them.
Facing reporters at the Fed's headquarters in Foggy Bottom, Mr Warsh outlined broad changes he intends to make at an institution that he has previously accused of mission creep, which he has said puts its independence at risk.
The starkest change came in the form of a drastically stripped-down post-meeting statement that also removed any mention of forward guidance. The 130-word press release noted the committee's decision to hold rates steady at roughly 3.6 per cent, a commitment to delivering price stability and maintaining ample reserves in the banking system.
“That statement just gives you the facts as best we can judge it, absent also is so-called forward guidance, which we agreed was not well suited to the current policy conjuncture,” Mr Warsh told reporters.
Mr Warsh, who previously served on the Fed's board of governors from 2006 to 2011, was also the only member on the 19-person Federal Open Market Committee to not include his projections for interest rates in the Fed's so-called dot plot. Markets typically analyse the dot plot to understand the central bank's thinking on where it could next move.
“It's not helpful in the conduct of policy,” he said.
His colleagues, however, indicated a hawkish pivot, with the median official estimating a rate increase this year. Markets pushed up their rate-hike projections accordingly.
'New chapter'
During his press conference, Mr Warsh said he was assembling five task forces in areas central to conducting policy, including the Fed's dot plot and quarterly projections. Other areas include the Fed's $6.7 trillion balance sheet, communications, data sources, inflation framework, productivity and jobs and the impact of artificial intelligence.
“What we've given markets is a new chapter for the central bank,” Mr Warsh said while also suggesting the Fed will maintain its 2 per cent inflation target.
“This is a lot of change for financial markets to digest. I wouldn't be particularly intrigued by how they react in the first several minutes or even for several days. What I think is most important is that financial markets, and at least as important, households and businesses know that the central bank will deliver on price stability."
The major changes signal the “reform-oriented Fed” that Mr Warsh suggested would come when he was sworn in last month. It also included a “family fight” that he had hoped for over monetary policy.
Although Mr Warsh did not submit his own projections, markets reacted to what his colleagues had forecast. Nine Fed officials anticipate raising rates at least once this year, including six members who want to raise rates twice. Another nine members expect one or no rate cuts.
"In our view, risks are now even more weighted to tightening than before the meeting, but less so than market pricing," wrote Derek Tang, an economist at MPA Macro.
The new projections demonstrate the hawkish pivot Fed officials have made due to reaccelerating inflation emanating from higher energy costs associated with the Iran war.
“There's a range of views on the questions of first and second round effects, no resolution or conviction, but we'll be meeting again in six weeks. I think we're going to know more than,” Mr Warsh said.
The Dow Jones Industrial Average shed more than 500 points on Wednesday while the S&P 500 and Nasdaq Composite slid 1.21 and 1.34 per cent, respectively. Treasury yields gained and the US Dollar Index climbed above 100.0. Gold fell 2.25 per cent to $4,256.00 per ounce.
“The dollar is steamrollering all of its major rivals and Treasury yields are holding firm on the policy-sensitive end of the curve as investors add to bets on a hike coming before year end,” Karl Schamotta, chief market strategist at Corpay, wrote to clients.
On the balance sheet, Mr Warsh said the group reviewing it would examine whether “monetary policy is coming from our interest rate tool or our balance sheet tool”.
Mr Warsh has previously argued the central bank should drastically reduce its balance sheet, which ballooned to as high as $8.9 trillion in June 2022 due to asset purchases during the 2008-09 global financial crisis and the Covid-19 pandemic in 2020.
The new Fed chief said he expects the task forces to begin work “in the next couple of weeks”.
“And we'll start to get some more information from them, some more framing of how they see things, starting in the fall, and hopefully most, if not all of them, concluding by year end,” he said.
