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What Can We Learn from Kevin Warsh's First Fed Meeting? · C-Suite Perspectives

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  Dana Peterson: Welcome to C-Suite Perspectives, a signature
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  series by The Conference Board.
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  I'm Dana Peterson, chief economist and leader of the Economy, Strategy
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  & Finance Center at The Conference Board.
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  And I'm also the guest host for today's episode.
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  Today, we'll discuss the new Fed chairman, Kevin Warsh, and the outcome of his first
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  press conference this past Wednesday.
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  Joining me is Yelena Shulyatyeva, senior US economist at The Conference Board.
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  Welcome, Yelena.
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  Yelena Shulyatyeva: Thank you, Dana.
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  Dana Peterson: So it's so great to have you here.
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  Yeah, big things happened yesterday.
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  Yelena Shulyatyeva: So much to talk about.
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  Dana Peterson: Yeah.
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  So let's start with just the big picture.
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  What's the biggest takeaway from Warsh's first FOMC meeting, and
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  especially the hawkish tilt and his discussions about institutional reforms?
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  Yelena Shulyatyeva: I think there was a surprise in the meeting, and there was
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  also something that was widely expected.
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  So it was kind of both, right?
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  So the biggest surprise to me was how hawkish some of the communication
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  was, like thinking about the dot plot.
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  Nine out of 18 dots that were submitted wanted a rate hike of some sort, right?
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  So that was kind of a hawkish tilt.
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  But at the same time, we got a whole host of discussions about the
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  reforms that the new chair would like to see on the Federal Reserve.
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  So that was expected, but probably the scale of the expected
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  reforms was also a surprise.
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  Dana Peterson: Yes.
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  They seem quite sizable.
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  So how different could the Warsh Fed look compared to Powell or even the last few
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  Fed chairs, even going back to Greenspan?
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  Yelena Shulyatyeva: Yeah.
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  Watching the press conference yesterday really was a throwback to the time when
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  young Yelena started on Wall Street, and she was listening and trying to
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  understand what senior colleagues were discussing at the end of the
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  Greenspan era and going into the Bernanke era, and what implications
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  for the market that would bring.
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  Yeah, stepping back, you really need to consider how policy changed
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  from Greenspan to Bernanke to Yellen to Powell and now to Kevin Warsh.
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  I think that each Fed chair had their own challenges.
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  They all had a Congress-directed dual mandate of maximum
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  employment and price stability.
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  But at the same time, again, they had different challenges, different
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  crises that they had to handle.
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  So Greenspan thought about it as markets know best, right?
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  Bernanke came, and uh, his goal was to save the system no matter
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  what, particularly at the time of the global financial crisis.
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  Chair Yellen put a lot of emphasis on employment.
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  And Chair Powell was addressing a lot of his own crises,
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  particularly during the COVID era.
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  Now, with Chair Warsh, I think the focus is on going back to more market-oriented
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  Fed, back to classical kind of Fed goal.
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  Less communication and, I think, a lot of reform
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  Dana Peterson: Yes, lots.
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  And, and I think markets, as well as businesses and consumers?
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  Are going to need to adjust to this.
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  So you mentioned communication.
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  So he's looking at an overhaul, and he has created these five task forces.
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  And indeed, you named your reaction to yesterday to the FOMC statement,
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  "We've got a task force for that."
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  That takes me back to when Apple had, you know, "We have an app for that." So Warsh
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  interestingly did not submit a dot in the summary of economic projections, and the
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  dot plot is basically projections of about 18, 19 people of where they think the
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  federal funds rate should be in each year.
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  And he didn't vote, and he also didn't use any forward guidance.
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  He took that out from the statement.
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  So we don't know.
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  We were thinking that the Fed would just strip out one word.
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  I think it was "additional."
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  Yelena Shulyatyeva: Additional, yeah.
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  To eliminate easing bias.
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  Dana Peterson: But the entire policy statement was different.
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  It was shorter.
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  It gave less information, but there was this promise about price stability.
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  So just going back to the dot plot, is this the beginning
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  of the end of the dot plot?
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  Yelena Shulyatyeva: I think so.
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  I think we will see probably the elimination of the summary of
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  economic projections and the dot plot.
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  It's up to the task force obviously, but I think we are tilting into that direction.
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  We could also potentially see fewer press conferences.
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  So there were a lot of questions about that during the press
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  conference, at this first meeting.
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  But obviously, he had a lot to say.
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  But Chair Warsh said that we will have a press conference
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  when we have something to say.
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  Which means that probably if they just don't, then they will skip a meeting.
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  So I think we will see fewer press conferences because of that.
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  Dana Peterson: Makes sense given what was transmitted yesterday.
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  So the FOMC was evenly split between hikes and no hikes, once
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  you take out Warsh's no vote.
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  What is our forecast, so TCB's view of policy rates into the future?
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  Yelena Shulyatyeva: So we think that the Fed will not
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  hike or cut in the near future.
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  So we just left the forecast unchanged following the FOMC meeting and the
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  press conference, and the reason is, it's just so much uncertainty.
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  It's so much uncertainty about how the ongoing crisis in the Middle East,
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  regardless of the pending agreement, how that will trickle through the economy.
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  It could still trickle much further into prices and eliminate some of the consumer
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  demand for certain goods and services.
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  So we still don't know the full impact of that on the US economy.
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  There are other external forces driving what is going on in the US economy.
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  So I think that we're going to stick to that forecast for now.
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  Yes, the communication was definitely in a much more hawkish direction, so
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  the dot plot, the stressing of the inflation mandate in the statement,
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  and also, they revised inflation forecast quite substantially.
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  That is all in a hawkish direction.
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  But at the same time, the statement mentioned supply side shocks, right?
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  Hinting at the temporary nature of these forces.
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  And by the way, they left the year's forecasts for inflation
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  relatively unchanged, and they are quite close to 2% inflation target.
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  So all of that is kind of saying the word "transitory" without saying that, and
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  that by itself may mean that the Fed will just not need to act in the near term.
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  So, sticking with the status quo on interest rates for now.
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  Dana Peterson: OK.
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  So 2026, TCB has no actions, no hikes, no cuts.
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  Yelena Shulyatyeva: Correct.
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  Dana Peterson: OK.
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  What do you think about 2027 and 2028?
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  What were they seeing?
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  I mean, was there a consensus in terms of where at the FOMC thought rates
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  should go in those next two years?
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  Yelena Shulyatyeva: The dots are lower from what they see in 2026.
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  So there was, again, nine people on the FOMC saw rates going
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  higher in 2026, but then kind of reversing back to a lower level.
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  So I think it's very premature at this point to even think about
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  what happens in 2027, 2028, again, because of so much uncertainty.
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  And the Fed didn't give us any help, how to think about it even, right?
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  Dana Peterson: guidance.
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  Yelena Shulyatyeva: OK, fine.
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  No forward guidance is one thing, right?
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  Just, OK, don't tell me what your commitment is for the future, but
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  at least explain it to me how did you come up to this decision today?
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  Dana Peterson: But that's the opacity that he wants to kind of restore because
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  he believes there's just a lot of noise.
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  Yelena Shulyatyeva: I think it's a dangerous thing, though, because this
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  flexibility in terms of what you could do next comes at a price, and the price is
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  that the markets will want to see higher return for all this uncertainty, right?
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  So eventually, that could actually mean high interest rates.
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  So there is a price for everything, and creating this vague uncertainty,
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  or whatever you want to call it, about any explanation of why you
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  did this at a particular meeting is probably not a good thing.
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  Dana Peterson: Yeah.
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  There's just going to be more speculation and wild theories.
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  And the question is, well, we saw in the prior fed administrations that they
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  would kind of tackle and address the wild accusations and the suppositions
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  to just have a clear message.
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  So do you get the sense that if markets start hallucinating kind of thing, making
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  up their own narratives, and it's becoming disruptive, do you think that the Fed,
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  and indeed, Chair Warsh, will step in and say, "OK, well, that's just not correct,"
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  or that's not what we're thinking, and that's not what we want to happen?
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  Or do you think it's still going to be kind of shrouded in—
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  Yelena Shulyatyeva: There's a task force for that.
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  Dana Peterson: There you go.
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  There's the answer.
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  Yelena Shulyatyeva: So, I really don't know, and that's the answer.
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  We will hear from at least two regional Fed presidents next week.
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  All this vagueness doesn't mean that Fed participants will not speak.
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  They will.
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  And it's actually regional Fed presidents' task to explain to
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  their regions, to their regional boards and people in their regions,
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  why policy is such or such, right?
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  So, and I hope we will hear from them, and we will get a little bit more clarity.
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  Dana Peterson: Absolutely.
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  We're going to take a short break and be right back with more
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  of my conversation with Yelena Shulyatyeva on Chair Kevin Warsh.
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  Welcome back to C-Suite Perspectives.
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  Again, I'm your host, Dana Peterson, chief economist at The Conference
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  Board, and also the leader of the Economy, Strategy & Finance Center.
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  And I'm bringing back Yelena Shulyatyeva, who is our senior US
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  economist at The Conference Board.
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  So let's just dive back into the questions.
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  Now, Warsh said that he's creating these five task forces to basically
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  review, analyze, and come up with suggestions for almost every aspect of
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  what the Federal Reserve System does.
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  So I'm going to go through these different task forces, and I'd love to hear from
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  you what he said, and then what could be some of the implications for businesses,
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  as well as markets and consumers.
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  So again, the inflation framework review, that's the first task force.
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  We talked about communication framework changes.
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  What aspects of the current inflation framework could be on the chopping block?
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  Yelena Shulyatyeva: So it could include a lot of things.
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  So how the Fed balances inflation versus the employment objective, what the Fed
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  does when inflation overshoots, how they communicate the inflation target.
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  Well, at least we know that for now, 2% inflation target stays, right?
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  But what else do you think could be changed?
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  Inflation is such an important objective here, but at the same time, we didn't hear
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  much about the other part of the mandate.
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  So what do you make out of it?
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  Dana Peterson: There, before he was confirmed, he did make suggestions that
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  perhaps we should go back to an earlier state, and you wrote about this in your
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  paper, of how the Fed should look at inflation and be either anticipatory
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  or data-dependent or waiting for balance, waiting for both mandates.
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  Yelena Shulyatyeva: They did reiterate the dual mandate in the statement.
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  Dana Peterson: They did.
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  Yelena Shulyatyeva: So, we did get that reassurance.
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  Dana Peterson: But we also got the guarantee of price stability.
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  And even during the press conference when Warsh was asked about something
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  related to the labor market, it was a very short comment.
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  So I think this is going to go back to, in some sense, the Greenspan days less
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  communication, let's just put it that way.
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  But also, I would say go back even further to mainly focusing on
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  inflation, and that actually goes back to 1950s, 1960s, before that.
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  Yelena Shulyatyeva: Or other central banks.
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  Dana Peterson: And other central banks who don't have a dual mandate.
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  So that's going to be really interesting to see if this
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  inflation framework is going to take precedence over and ultimately
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  supplant this kind of dual mandate.
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  I guess I want to ask a couple of questions about inflation gauges.
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  So there are lots of inflation gauges, and one thing Chair
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  Warsh talked about was data.
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  And most of the time, the Fed pays attention to the PCE deflator headline.
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  And they also take a look at the core to see underlying movements.
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  But do you think there's going to be more types of inflation
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  considered in the policy?
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  So things like trimmed mean and—
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  Yelena Shulyatyeva: Well, he clearly mentioned the trimmed
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  mean measures of inflation.
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  I think it's probably broader than that.
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  I think that Chair Warsh is questioning the validity of data like, at large, and
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  whether traditional economic indicators adequately reflect what is going on.
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  So I mean, there's some sense in it because we probably do need a
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  comprehensive review of the data that we're using, especially in the new
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  age of all the AI and other things.
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  So think about how we measure housing prices, right?
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  So it's a very indirect way of doing it, and at the same time, we do
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  have some real market data on this.
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  Dana Peterson: Absolutely.
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  Yelena Shulyatyeva: Or think about, I don't know, PCE,
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  inflation measures you mentioned.
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  13% of PCE index is imputed prices, so there is like an estimate of
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  some sort of what the prices were, and it's not a direct observation.
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  There's definitely some room for improvement there.
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  Dana Peterson: Absolutely.
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  Yelena Shulyatyeva: The question is, what is the cost, and how you resolve it?
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  Yeah, we're all for better data and better use of sources and wider use of
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  sources, but how do you approach that?
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  And it's not an easy solution.
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  Dana Peterson: It isn't.
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  And you're also going to need the cooperation of the private sector.
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  Lots of corporations have granular data.
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  Lots of industries, but they're reluctant to share it because of course, there's
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  competitive intelligence in that, and they don't want to tip off their competitors.
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  But also there's a concern about what it's going to be used for, the privacy of their
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  customers, and all these kinds of things.
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  So Warsh seemed to be supporting including more measures, including private sector
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  measures, higher frequency measures.
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  But again, it's, can we trust all of it?
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  Is it all rigorously done the way BLS and the BEA produce data?
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  So those are going to be questions that have to be answered.
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  And so would you say that AI and private sector data will become more important
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  input into monetary policy decisions?
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  Yelena Shulyatyeva: I think so.
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  I think so.
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  There's definitely some movement in that direction.
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  And at least there will be a comprehensive review of the data, which
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  is, I think it's a positive thing.
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  We all agree on that.
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  But again, it goes back to the costs.
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  Why the government data may not be reflecting the recent developments.
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  Well, because there's a cost to everything, right?
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  So there's like the lack of financing and all of these different issues, challenges
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  that statistical agencies are facing.
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  Dana Peterson: Yeah.
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  So maybe Warsh can turn the tide and get more money into better data.
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  Yelena Shulyatyeva: Better data is all we are for.
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  Dana Peterson: Yes, and I rally for that.
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  Let's talk about the balance sheet.
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  Use of the balance sheet is an unconventional tool, and certainly
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  adding private assets, as well as government assets, to the Federal
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  Reserve's balance sheet was unprecedented.
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  But that was done, it was called quantitative easing at the
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  start of the Great Financial Crisis, and it was repeated.
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  We had several rounds, different types of things.
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  We had Operation Twist before that.
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  And then we also, the Fed also used quantitative easing
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  when the pandemic struck.
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  It was kind of like, everyone was like, "OK, we experienced a 10-year financial
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  crisis. We're going to go all in to get us back out. No experimentation."
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  And then once that passed, the Fed started dialing down
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  the size of the balance sheet.
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  But it seemed like, they're pretty much done, as of Powell's last meeting.
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  But Chair Warsh has expressed concerns about the balance sheet.
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  Is it still too large?
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  Because the goal was to manipulate markets, particularly the bond
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  market, and also to rescue the asset base, like housing.
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  But mainly the bond market, to depress the back end of the yield curve.
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  And so with quantitative tightening, as it's colloquially called, or
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  reducing the size of the balance sheet, that actually takes some of
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  the weight off of the yield curve.
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  So yield curves did rise due to QT. And it wasn't just Fed cuts.
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  It was both of those things.
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  They were taking their foot off.
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  But there's also fiscal policy.
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  But he thinks that even at this level, it's probably too much.
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  It's still distortionary.
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  You know, there are a lot of concerns about the balance sheet expressed by
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  Warsh and many other Fed observers.
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  So do you think that there's going to be greater emphasis on the side of
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  the balance sheet and also uses of the balance sheet in terms of price easing?
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  Yelena Shulyatyeva: I think any changes with respect to the
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  balance sheet will be gradual.
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  So let me put it right there.
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  The statement reaffirmed an ample reserve regime, as well, so that's a very
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  important thing, as well, because it just leaves things where they are as of now.
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  Dana Peterson: Kind of puts a floor on how low you want to take the balance sheet.
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  Yelena Shulyatyeva: But I think that the task force will take a
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  look at the size, the composition, the duration of the balance sheet,
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  every single aspect of that.
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  And this is definitely worth watching what they come up with at the end of the year.
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  Let me just tell you something.
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  So when the crisis hit, right?
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  Go back to the COVID crisis.
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  It required a concerted action from all kinds of different authorities,
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  fiscal, health care, monetary authority, to conquer the crisis, right?
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  To stop the spreading of the crisis into the markets and all kinds of different
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  things that could have happened.
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  I would be really surprised if, in case of a different crisis, and
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  obviously, we don't wish for one.
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  But if something happens, I would be very surprised if we
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  don't see the repetition of that.
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  So it works.
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  It requires all kinds of different things, and the balance sheet is a
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  tool in the Fed toolkit that could be effectively used to do that.
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  So it's just a matter of what it looks like during normal times
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  and in the time of the crisis.
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  Dana Peterson: What's normal?
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  Yelena Shulyatyeva: Yeah.
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  Dana Peterson: But one thing you did say you have been writing about the balance
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  sheet is that any changes are going to be evolutionary, rather than revolutionary.
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  Yelena Shulyatyeva: And I stick to that.
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  Dana Peterson: Great.
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  So if you fast-forward to the end of this year, which of the five task
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  forces is most likely to produce a recommendation that will materially
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  change the Fed's operations?
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  Yelena Shulyatyeva: I think we heard it loud and clear at the press conference
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  that Chair Warsh really wants to leave a significant footprint in terms
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  of changing how the Fed operates.
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  He wanted to establish himself as a reformer, and I think we will see
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  significant changes with respect to every single aspect of how the Fed operates.
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  It's real, and I think we are into finding a lot of interesting
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  details at the year-end.
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  Dana Peterson: Yeah, so you should be very busy with answering everybody's questions.
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  Yelena Shulyatyeva: We all will be very busy.
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  Dana Peterson: For our members and the public on deciphering what the Fed's
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  going to look like going forward.
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  So the last question is, five years from now, we look back to Chair Warsh's
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  tenure what will be the defining legacy?
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  Will it be higher interest rates or lower interest rates, different
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  types of communications, or just a fundamentally different policy framework?
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  Yelena Shulyatyeva: I hope the dual mandate stays the same, and the Fed pays
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  equal attention to the both sides, right, maximum employment and price stability.
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  I think we will see a lot of reform in terms of communication,
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  and we'll have to get used to how the Fed operates in a new regime.
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  But after all, I think the Fed will be there, and it will be the
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  lender of last resort if needed, and I think that will not change.
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  Dana Peterson: Excellent.
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  That was a great conversation, Yelena.
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  Yelena Shulyatyeva: Thank you so much, Dana.
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  Dana Peterson: And thanks to all of you for listening to C-Suite Perspectives.
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  Again, I'm Dana Peterson, and this series has been brought
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  to you by The Conference Board.