Warsh's Fed Changes: Unanimous Rate Hold, Behind-the-Scenes Shifts

Warsh's initial changes to the Fed are in some ways modest. The 12 members of the rate-setting Federal Open Market Committee voted unanimously to hold interest rates steady at 3.5-3.75%, just as traders have expected for weeks.

But behind the scenes, much is changing — even in the process of how the Fed came about making that core decision.

Prior Fed chairs had offered different policy statements for the committee to consider. Warsh changed that.

"There was one proposal on the table," Warsh said. "The group was unanimous and unambiguous on it."

That shift and others show Warsh carefully marshaling his political capital for the bigger alterations he has planned.

The bulk of Warsh's prepared remarks at the top of the press conference — and much of the discussion with reporters that followed — was spent detailing a series of task forces. These will deal with communications, the balance sheet, data, productivity and jobs and the Fed's inflation framework, Warsh said. They will pair internal Fed staff with external experts, whom Warsh said he is in the process of selecting.

Warsh's task forces have the ring of the classic do-nothing government blue-ribbon commission, but they are central to his theory of change at the Fed. Warsh's authority as Fed chair is largely delegated by the Fed's Board of Governors and the wider FOMC. The task forces are an attempt by Warsh to prompt the Fed's other members to come around to his way of thinking all on their own, with a little helpful guidance from the outside experts he selects.

Warsh also pointedly declined to submit an economic forecast to the Fed's Summary of Economic Projections, which includes its famed "dot plot," though he allowed his colleagues to do so because "that's the commitment that the FOMC made."

By withholding his own views about where interest rates are headed, Warsh effectively devalues the rest of the Fed's views. Any discussion about the future path of interest rates now has to include the caveat that the Fed's most influential official, the chair, hasn't stated his opinion on the matter. And that saves him the trouble of taking an immediate, difficult vote on how to change communications.

That vote instead is deferred until closer to the end of the year, when his communications task force delivers its report, Warsh said. That process may also result in changes to the Fed's practice of releasing transcripts to its meetings, he said, and to the press conference itself. That would have the effect of pulling back even further on how much the public can see into the Fed — beyond what the chair wants to say.

Some of that is by design. Warsh declined to discuss the market's sinking reaction to his unfolding comments because, he said, he valued the "unfiltered" market reaction. "What we've given markets is a new chapter for the central bank."

The two-year Treasury yield rose 16 basis points following the Fed's statement, suggesting investors believe Warsh will eventually need to raise interest rates. That is a large move for one day, and how investors and the Fed can adjust to a new era of volatility remains to be seen.

Another risk for Warsh in this process is that the other members of the Fed simply may not agree to come along for the ride. The Fed is an effective institution in part because of its decentralized power. The Fed's governors serve 14-year terms and are difficult to remove. Its regional bank presidents have a right to speak their own minds.

It may be relatively clear in a moment of profound transition for the global economy that the Fed should wait and see if inflation continues to worsen. But if members of the Fed come to believe that, for instance, Warsh is putting too much emphasis on the promise of artificial intelligence and underweighting the risks of energy price increases, they will simply vote him down. Warsh can manage dissent at the Fed but cannot fully contain it.

But at least for now, Warsh can assume the voice of the Fed. "This committee will deliver price stability," Warsh pledged. If he can do that, all the other changes he wants may come easily.