New Fed Chair Warsh and the future of the Fed

New Chair of the Federal Reserve Kevin Warsh held his first Federal Open Markets Committee (FOMC) meeting last month. The FOMC opted to hold the federal funds rate steady, and Warsh outlined changes he wants to make to the Fed.

In the latest Economic Update, America’s Credit Unions Vice President of Data and Research and Chief Economist Curt Long, walked through the details of the FOMC meeting and how Warsh may shape the Fed.

“Following an extended search, President Trump nominated Kevin Warsh to take the reins of the Fed from former Chair Jerome Powell,” said Long. “Given the President’s opposition to rate hikes, many observers interpreted the search process to be a vetting process for their openness to cutting rates.”

However, Long pointed out that recent economic data have made it incredibly difficult to cut rates. Inflation has been on the rise, and the labor market has added an average of 180,000 jobs per month for the last three months.

Following the FOMC’s decision to maintain the federal funds rate, markets began to price in two rate cuts between now and the end of the year. That marked a sharp change from the expectations of rate cuts that markets had prior to the war in Iran.

During his press conference, Warsh laid out his plans for five Fed task forces. Long walked through two of those task forces and their potential impacts: Fed communications and its balance sheet.

He noted that the FOMC’s June statement was much “skimpier on details” than those of past committees. In addition, Long said Warsh opposes forward guidance, which signals where the Fed expects rates to go.

“Chair Warsh didn’t submit any projections. His view is that these FOMC estimates shape perceptions and distort financial markets,” said Long.

Long also talked about the Fed’s balance sheet. Since the 2008 financial crisis, the Fed has seen a big increase in its reserves. Instead of focusing on its active trading desk, the Fed “began paying interest on reserves, which successfully brought the fed funds rate back under its control, but also brought increased scrutiny.”

For credit unions, Long said, in the short term, they can expect rate hikes.

“Longer term, if Chair Warsh is successful in reshaping the Federal Reserve to align with his stated views, it likely means greater market volatility. Reducing Fed communications and forward guidance may have certain benefits, but it will mean a wider variety of market perspectives on future Fed monetary policy.” 

Watch the full Update 

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