MNI FED WATCH: Warsh Leads FOMC Inclined To Hike Rates

Kevin Warsh kicked off his tenure as Fed chair Wednesday by cautiously embracing an FOMC that is increasingly thinking about raising interest rates before the end of the year. 

Warsh, who during the nomination process suggested interest rates should be lower, is now being forced to chair a committee worried by growing price pressures related in part to the supply shock from the war in Iran. 

The Fed’s dot plot showed nine officials wanted to hike rates at least once, six of whom were projecting multiple increases before year end. FOMC members sharply revised up their inflation forecasts of the PCE and core PCE to 3.6% and 3.3% respectively, up from 2.7% in the March Summary of Economic Projections. 

“I am happy to report that members of the FOMC are unambiguous and unanimous – this committee will deliver price stability,” Warsh told reporters at his first press conference as chair. (See MNI INTERVIEW: Fed Needs To Signal Ready To Hike-Baumeister) 

GUIDANCE PULLBACK

Warsh put his mark on the Fed’s policy statement by putting into practice a more circumspect approach to communication that avoids any hint of forward guidance on rates. He also offered much less detail on his economic and rates views than his predecessors in the press conference. 

“Absent also is so-called forward guidance, which we agreed was not well suited to the current policy juncture,” Warsh said. 

He also refrained from submitting his own dot to the Summary of Economic Projections, an early effort to move away from what Warsh sees as undue commitments on the future path of policy. 

“I did not submit a dot. For me, it’s not helpful to the conduct of policy,” he said. (See MNI INTERVIEW: Warsh Set To Dial Back Fed Guidance - Swanson)

The policy statement affirmed the committee’s desire to return to price stability and nodded to strong productivity growth that could be used to argue that the economy can grow more robustly without generating inflation.

The Fed also reaffirmed its policy of maintaining ample reserves in the banking system. Warsh has called for shrinking the balance sheet significantly over time, but not specifically returning to the pre-crisis framework of scare reserves. 

'A TASKFORCE FOR THAT'

Warsh, who promised regime change at the central bank, announced the formation of five task forces focused on communications, the balance sheet, economic data, productivity and jobs, and the Fed’s inflation framework. 

He made clear he would not prejudge the outcome of these groups, adding that he would consult the best minds from inside and outside the Fed to guide the recommendations. 

Still, he reaffirmed the Fed’s commitment to the 2% target: “I see no reason, until we have reestablished our commitment and ability to deliver on the 2% inflation objective, to revisit that. So that'll be outside the scope of what we're taking on.”