Warsh's regime change at the Fed pushes ahead
Fed Chairman Kevin Warsh is driving rapid change in some areas, while his emerging policy framework suggests further rate hikes remain possible.
TL;DR
- Fed Chairman Kevin Warsh is implementing a regime change at the central bank, altering communication and policy frameworks.
- Warsh's new approach emphasizes broad financial conditions, including asset prices, credit availability, and commodity prices, over traditional forward guidance.
- Markets are pricing in additional rate increases due to persistent inflation, which has been above the Fed's target for an extended period.
- Larger institutional reforms, such as shrinking the Fed's balance sheet, are progressing slower as Warsh seeks consensus and due to economic concerns.
- Warsh has moved away from traditional terms like 'accommodative,' 'neutral,' or 'restrictive' to describe the federal funds rate, causing some consternation.
- The market is signaling expectations for further rate hikes, with significant spreads between the 2-year Treasury yield and the federal funds rate.
- Warsh's focus on a wide array of market indicators is reminiscent of former Fed Chair Alan Greenspan.
- Despite Warsh's desire to reduce the Fed's balance sheet, other FOMC members are hesitant, preferring to wait for task force reports.
- The current economic environment, with high inflation and rising commodity prices, makes it a less opportune time for balance sheet reduction.