FOMC LIVE - The Warsh Playbook

In his inaugural FOMC press conference, newly appointed Fed Chair Kevin Warsh presents a significantly streamlined policy statement and announces a strategic shift in Federal Reserve communications and operations. The Fed maintains the federal funds rate at 3.5-3.75% while reaffirming its commitment to maintaining ample reserves in the banking system.

Warsh emphasizes that economic activity is expanding at a solid pace despite Middle East tensions, with strong productivity growth and capital investment. However, he stresses that inflation remains elevated relative to the 2% target after running above this goal for over five years. Notably, Warsh states that inflation is "a choice" determined by monetary policy and that the committee is "unambiguous and unanimous" in its commitment to deliver price stability.

A major departure from previous Fed communications is the elimination of forward guidance from the policy statement. Warsh explains this decision by noting that forward guidance was "not well suited to the current policy conjuncture" and argues that financial markets perform best when reacting to incoming data rather than Fed guidance. He advocates for markets to price information independently, allowing market prices to inform Fed decision-making rather than markets simply reflecting Fed statements back to policymakers.

Warsh announces the creation of five task forces addressing: (1) Fed communications, including potential changes to the Summary of Economic Projections (SEP); (2) balance sheet policy and the ample reserves regime; (3) data sources and methodologies for economic measurement; (4) productivity and jobs in the context of AI and new technologies; and (5) inflation frameworks examining drivers of inflation from first principles. These task forces are expected to begin work within weeks, with preliminary findings in fall and most conclusions by year-end.

On the inflation target itself, Warsh firmly states that the 2% objective remains unchanged and outside the scope of current review, noting he focuses on "the left of the decimal point" (the 2) rather than discussing whether the target is too strict. He rejects the notion that the Fed must choose between price stability and employment, arguing instead that strong growth, low prices, and strong employment can be mutually compatible with proper policy.

Regarding rate trajectory, Warsh notes the median SEP projects 3.8% federal funds rate by year-end 2024 and 3.6% by end of 2025, with core PCE inflation at 3.6% this year and 2.3% next year. However, he emphasizes that the dot plot submissions came with "big erasers," indicating colleagues don't feel bound by their projections amid rapid economic changes.

Warsh addresses labor market conditions as stable with job gains keeping pace with workforce growth and unemployment little changed. He characterizes monetary policy's current restrictiveness as "uneven," appearing somewhat restrictive in housing markets but difficult to characterize similarly in financial markets. He emphasizes that the Fed will focus on ensuring supply shocks in energy, food, and other sectors don't broaden through second and third-order effects in the economy.

On AI and productivity, Warsh describes artificial intelligence as perhaps the most important technological change of his adult lifetime, filled with both opportunity and risk. He notes the race between AI-driven demand growth (evident in data center capex) and potential future supply expansion, emphasizing that the Fed should count both rather than favoring one over the other. He frames strong productivity-led growth as something to embrace rather than fear.