Warsh holds Fed rates steady as projections tilt toward a hike

The Federal Reserve left its benchmark federal funds rate target unchanged at 3.5% to 3.75% on Wednesday in Kevin Warsh’s first policy meeting as chair. The decision was expected, but the central bank’s updated projections pointed to the possibility of tighter policy later this year, and CNBC reported that major U.S. stock indexes fell after the meeting and Warsh’s news conference.

The most market-sensitive signal came from the Fed’s interest-rate projections, commonly known as the dot plot. The Federal Open Market Committee was divided 9-9 between participants who expected rates to remain steady or fall and those who saw at least one increase, according to CNBC. The median projection implied a quarter-point rate rise.

The dot plot is closely watched because it converts individual policymakers’ rate expectations into a public map of possible policy paths. It does not bind the committee, but investors often treat shifts in the median estimate as evidence that the center of gravity inside the Fed has moved.

Warsh withholds his own rate projection

Warsh confirmed that he did not submit a rate projection, after speculation ahead of the meeting that he would decline to add his own dot. He said the decision was consistent with his long-held concerns about the structure of the Fed’s Summary of Economic Projections.

“It’s been the practice of this committee for participants to submit these projections, and I have encouraged my colleagues to continue to do so. I, however, have refrained from offering any projections of my own consistent with my long-held views on the SEP, at least as currently structured,” Warsh said.

Warsh has previously criticized forms of forward guidance that can constrain future policy decisions, CNBC reported. His refusal to submit a dot makes the Fed’s published rate path harder to interpret, because the chair’s own view is not embedded in the distribution.

New chair signals institutional review

Warsh also announced the creation of five task forces as part of a broader review of how the central bank operates. The groups will study Fed communications, the balance sheet, the data the central bank uses, productivity and employment, artificial intelligence and other transformative technologies, and the Fed’s approach to inflation.

Jason Pride, chief of investment strategy at Glenmede, said the task force announcements suggested “an institution in active review rather than steady state,” adding that investors should expect the Fed’s operating framework to look different during Warsh’s tenure than it did under his predecessor.

The chair also placed repeated emphasis on the Fed’s inflation mandate. CNBC said Warsh used the phrase “price stability” about a dozen times and described the committee’s resolve to bring inflation under control as “unambiguous and unanimous.”

The policy-sensitive 2-year Treasury yield rose 14.4 basis points after the meeting, according to CNBC. Shorter-dated yields tend to react strongly to changes in expected Fed policy because they are closely tied to anticipated overnight rates over the next several years.

Rick Rieder, head of fixed income at BlackRock, said the meeting marked “a new era of monetary policy in the United States.” Krishna Guha, head of central bank strategy and economics at Evercore ISI, said Warsh sounded “a bit like old hawkish Fed governor Warsh” as he stressed the price-stability mandate.

The Fed also shortened its post-meeting statement. CNBC reported that recent statements before Warsh’s arrival typically exceeded 300 words, while Wednesday’s statement ran 130 words. Dario Perkins, managing director of global macro at TS Lombard, said Warsh appeared to be presenting himself first as “the reformer” and added that “Fed watching just got harder.”

This story draws on original reporting from CNBC.