How Kevin Warsh has set out to remake the Fed

Federal Reserve Chairman Kevin Warsh’s first big announced changes point toward a quiet revolution, with task forces set up to rethink virtually everything done to set policy and the approach used to get there.

Following his first meeting at the helm Wednesday, Warsh outlined the plan — a sprawling, ambitious endeavor entailing five task forces that will utilize resources and experts within the Fed and from the outside.

The reviews amount to a comprehensive examination of all the areas that define modern monetary policy. No chair in recent history has launched a project that has matched the ambition of this one.

Their job will be to examine communications, data the Fed uses to measure the economy, the view on inflation and its causes, the impact of technology such as artificial intelligence and the size and composition of the Fed’s $6.7 trillion balance sheet and the potential path to cutting the holdings.

The task forces will “start with first principles, ask hard questions, examine current practice, consider alternatives, and ultimately propose next steps for policymaker consideration,” Warsh said.

“Each task force will serve an objective shared by everyone in the system, shared by everyone around that table that I sat with over the last couple of days: a Federal Reserve that is clear-eyed about its mission, fit for purpose, and focused on the future,” he added.

In announcing the task forces, Warsh was emphatic and deliberate.

But gone was the harsh rhetoric he has used to denounce the central bank over the past year.

Last July, Warsh, in a CNBC interview while he was campaigning for the job, called for “regime change” at the Fed and cited a “credibility deficit” caused by “incumbents” at the institution. In its place were comments about how “incredibly impressed” he was with what he’d seen in his first weeks on the job and how the meeting “exemplified the very best of the Fed’s traditions.”

What once looked like a potentially rancorous atmosphere inside the institution quickly become collegial as Warsh looks to carry through a fundamental rethink of how it does business.

“What I think we’re seeing is regime change, but in a velvet glove,” said Scott Clemons, chief investment strategist at Brown Brothers Harriman. The task forces “basically are going to review and maybe revise all the working aspects of Fed practice, from communications to data sources to the way they approach the balance sheet to the inflation framework. There’s a lot of potential regime change there.”

Warsh’s decision to take the positive view came as little surprise to Fed veterans, several of whom spoke in favor of the direction the new chairman charted.

“All those who’ve been in the Fed know that the way change operates is through just what he did, which is create task forces to build consensus,” former central bank Vice Chair Roger Ferguson told CNBC. “There are some things that one can get rid of that I think would be helpful and there are others where maybe he must be careful.”

Former Cleveland Fed President Loretta Mester served on a communications subcommittee during her tenure that ran from 2014 to 2024, part of a nearly 40-year career at the central bank. She’s familiar with prior efforts the Fed made to enact change that perhaps weren’t quite as codified as the approach Warsh is taking.

“All the things he’s looking at are things that the Fed has looked at. But he’s organizing the work, and I think he’s putting it on a faster than typical timeframe for some of these projects that the Fed has undertaken before,” Mester said. “So, I think this is all good to be studying. Of course, we’ll have to see what then the recommendations are, and what changes he wants to make.”

One of the most visible areas Warsh has changed is communication.

The post-meeting statement eschewed much of the boilerplate language of its predecessors and instead offered a bare-bones view of what the committee decided and how it views current economic conditions. In format, the statement began with the actual rate action — unchanged, as expected — a callback to how the Fed used to formulate its statements prior to March 2009. Since the financial crisis-era period, the Fed had been starting the statements with an assessment on the economic state of affairs.

Mester said she has no problem with the Federal Open Market Committee returning to the prior format. However, the statement this week also deleted so-called forward guidance language, something she said officials may want to address with more information about the Fed’s “reaction function,” or the outline of how and why the Fed will adjust its position to economic factors.

“I like the fact that they got rid of a lot of what we would call boilerplate language that really wasn’t serving any purpose anymore,” she said. Mester added that the Fed has long had a “Hotel California problem.”

“Once a phrase or sentence got in there, it was very difficult to get it out. So this was a needed sort of purging,” she said.

Other areas likely to be explored will be the elimination of the “dot plot” rate forecasts from individual FOMC participants as well as a potential adjustment to the news conferences chairs have held for the past 15 years.

The task forces will take aim at a broad swath of Fed operations.

On the balance sheet, Warsh has long objected to the Fed’s large position in bond markets, which swelled during and after the financial crisis of 2008, as well as in the Covid pandemic in 2020.

There also will be a study of how the Fed gauges inflation after being above its goal for five years following the erroneous “transitory” call in 2021 and 2022. Artificial intelligence and its impacts also will be in focus, as will a comprehensive view of the metrics that the Fed is using to gauge the economy, with an expected look at further using data and analytics for guidance.

BlackRock fixed income chief Rick Rieder, himself a finalist for the nomination that Warsh won, called the chairman’s approach “a new era of monetary policy in the United States.”

“Building a sense of confidence in achieving monetary policy targets will only be enhanced by an impressive consideration of complex subject matter that could be very influential on the economy and Fed targets going forward,” Rieder said in a post-meeting note. “So, this time is different, we are hearing about a different philosophy, different tools, and potentially a very different policy ethos.”

One important way to make it all work is to provide clear lines about what will be moving monetary policy in the future, added Mester, the former Cleveland Fed president.

“It doesn’t have to be numerical, doesn’t have to be very prescriptive, but to get a sense of kind of what are they looking at, what kinds of things are going to persuade them one way or the other,” she said. “I think that’s something that we want our central bankers to be able to articulate to us. Otherwise it’s sort of ‘trust me,’ and ‘trust me’ is not good communication.”