On Sept. 15 and 16, Federal Reserve Chair Kevin Warsh presided over his third Federal Open Market Committee (FOMC) meeting, the body responsible for setting the interest rates that shape the American economy.
With August jobs numbers coming in stronger than analysts expected, the Fed unanimously decided to raise interest rates by a quarter percentage point for the first time since 2023. Its new benchmark interest rate sits at a target range of 3.75% to 4%, and markets are expecting at least one additional interest rate hike by the end of the year. That decision unfolded against a striking backdrop: inflation has run above the Fed's 2% target for more than five and a half years.
“The plain fact is that inflation is too high and has been for too long,” stated Warsh. Few economists disagreed with Warsh’s determination and the Fed’s decision—but President Donald Trump did.
Trump quickly critiqued the committee’s undivided vote to raise rates via social media. “LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!” he cried.
And upon landing in North Carolina for a campaign rally, the president told reporters he blamed Warsh’s Board of Governors for the decision. “I told Kevin, I said, ‘You might as well vote with the board because it’s just not going to matter.’ The board is very hostile,” he said. “They’re very political. They’re doing the wrong thing. They’re a bunch of politicians.”
Warsh took the helm of the more than century-old institution earlier this year and has moved quickly to put his stamp on it, launching five task forces within his first month, each charged with developing recommendations across a different area of the Fed's mandate. How far he can take that reform agenda will depend on his ability to build coalitions among fellow board and FOMC members and to hold the confidence of financial markets.
At the press conference following his first FOMC meeting in June, Warsh announced several initiatives covering the Fed's communications strategy, balance sheet, data sources, productivity and jobs, and inflation framework. Each is led by three outside experts drawn from academia and industry. The groups are expected to deliver preliminary findings this fall, with most wrapping up by year's end.
The pace and ambition of the efforts signal that Warsh is serious. Whether it proves truly transformative remains an open question.
Watch the data, not the Fed
Of his five reform areas, communication has drawn the most attention, and Warsh moved on it before the task force even convened. He stopped offering long-term projections on Fed policy actions and simplified its press releases, signaling a clear break from recent practice. At the heart of this shift is Warsh's belief that markets have grown too dependent on Fed communication, paying more attention to what officials say than to the underlying economic data. He argues this creates a feedback problem: if markets are reacting to the Fed rather than to the data, the Fed gets a distorted read on where markets actually stand.
Central to this critique is his skepticism of forward guidance, the practice by which Fed officials provide long-term outlooks to signal predictability and transparency. Forward guidance in various forms has been used since the 1990’s but became central as a policy tool when the policy rate reached “the zero lower bound” during the 2008 financial crisis. It was never fully retired. Warsh wants to end it, arguing that it ties the Fed's hands and leaves officials with less room to respond to new information as it arrives.
"The role of forward guidance should be limited and circumscribed. Otherwise, it risks creating ambiguity in the name of clarity. Oversharing policy deliberations and overcommitting to future decisions can lead markets, businesses, and households astray,” argued Warsh. “And I believe when policymakers make quasi-commitments on interest rates through the cycle, we inhibit our own freedom to make the right calls when it's time to decide."
Yet even a more restrained communication style does not insulate a Fed chair from market scrutiny. After his second FOMC meeting in July, Warsh learned that lesson firsthand. Many observers felt he underperformed at the press conference, and markets responded with alarm, raising questions about his credibility at a moment when inflation remains stubbornly high and the chair, while acknowledging the problem, has appeared reluctant to deploy his most powerful tool: raising interest rates.
To be sure, Warsh is not the first Fed chair to rattle markets during a first-year press conference. Both Jerome Powell and Janet Yellen had similar stumbles early in their tenures. What matters is the recovery, and Warsh moved quickly to make one. At the annual Jackson Hole Economic Policy Symposium in Wyoming at the end of August, he delivered a forceful address on the state of the economy and the urgency of bringing inflation to heel, reassuring markets and resetting the tone ahead of September's meeting.
Warsh's push to streamline Fed communication extends to the meeting calendar itself. He has proposed reducing the number of annual FOMC meetings from eight to six, which would mark the first such structural change since the 1980s. Fewer meetings, he argues, would give the committee more time between sessions to absorb incoming data and deliberate before acting. Critics counter that the tradeoff is agility. With only six scheduled meetings a year, the Fed would have fewer opportunities to respond to fast-moving economic conditions without resorting to emergency sessions and inter-meeting moves. Importantly, Warsh has not convinced critics that the current schedule leads to worse policy outcomes.
Every corner of the Fed under review
Among Warsh’s remaining reform areas, the balance sheet and inflation framework task forces carry the greatest consequence. After the 2008 financial crisis, the Fed began purchasing long-term government bonds and other securities to inject liquidity into the economy, a practice known as quantitative easing. Its balance sheet swelled from roughly $1 trillion before the crisis to nearly $9 trillion in the wake of the Covid pandemic. It currently stands at $6.7 trillion, a level Warsh views as excessive. Bringing this total down is one of his stated goals, but doing so is acutely market sensitive. Any reductions will need to be phased in gradually and communicated with care, as an abrupt shift risks triggering the kind of market disruption the Fed is expressly trying to avoid.
The inflation framework task force operates under similarly intense scrutiny from policymakers and markets alike. The 2% inflation target itself is not on the table. The task force will instead examine the drivers of inflation, how it is measured, and what tools are available for delivering price stability in a changing economy.
The fourth task force examines the economic impact of technology, and artificial intelligence in particular, on the Fed's dual mandate of keeping prices stable and employment high. The fifth focuses on data sources, evaluating new information streams and methodological changes to improve how the Fed collects data and measures inflation. The goal is to give policymakers more current information on the state of the economy.
What Warsh needs
To enact any of these changes, whether on the balance sheet, the inflation framework, or the number of FOMC meetings, Warsh will need to bring his fellow policymakers along. The chair has the authority to convene the task forces and shape their composition, but any resulting changes require approval from the seven-member board of governors, or in the case of FOMC meetings, the full 19-member committee. All proposed reforms will face intense internal debate. The recent frequency of dissents during FOMC meetings suggests that not all members will greet the reform agenda with equal enthusiasm. How transformative Warsh's tenure proves to be will therefore depend not only on the ambition of the proposed reforms but on his ability to bring a majority of colleagues on board. And as his July press conference demonstrated, financial markets will be watching and rendering their own verdict throughout.
Warsh has taken over the Fed at a turbulent moment. Inflation has been running above the 2% target for half a decade. Supply shocks from the conflict in Iran and the closure of the Strait of Hormuz, combined with repeated tariff threats from the White House, have injected fresh uncertainty into the U.S. economy. Meanwhile, the effects of artificial intelligence, beyond an immediate boost to economic activity, and the potential productivity gains as well as the potential job losses, remain difficult to measure and even harder to predict. And with midterm elections approaching, political pressure is only likely to intensify. Trump has repeatedly called for lower interest rates, and he seems unlikely to quiet his calls.
Faced with these pressures, Warsh has set out on an ambitious reform path. Whether he succeeds will come down to two things: the pace at which he can advance his agenda, and his ability to bring enough of his fellow Fed members with him. Most importantly, Warsh and his colleagues will need to convince the public, the financial markets, and Congress that the changes adopted will lead to better policy making.
This is his ultimate challenge.
