Warsh's New Regime at the Fed: A Shift in Approach and Possible Rate Hikes

Warsh's regime change at the Federal Reserve is taking shape, just over four months into his tenure as chairman. He has made some cosmetic changes to how the Fed communicates, such as shortening the news conference after FOMC meetings and changing the seating arrangement for reporters. However, these changes hide a more profound shift in Warsh's approach to monetary policy, which represents a break from his predecessors.

Warsh hasn't been able to act yet on one of his key priorities, cutting the Fed's balance sheet, due to inflation being a pressing concern. He has also constrained himself by appointing five task forces to examine Fed practices, with reports expected early next year.

Last week's unanimous quarter-point interest rate increase was seen as an answer to critics' concerns about Warsh's independence from President Donald Trump. The 2-year Treasury yield traded nearly a full percentage point above the effective federal funds rate on Wednesday, indicating traders expect more rate increases. Inflation is running at 3.7% as measured by the Fed's preferred personal consumption expenditures indicator in July.

Warsh has been criticized for lacking credibility due to his vague performance in July, but a careful look at his public comments suggests he has articulated a new regime for determining policy. This framework encompasses a broad array of financial and market indicators, including credit spreads, the Fed's Senior Loan Officer Opinion Survey, and credit availability and demand.