Director Waller publicly criticized his "speak less" philosophy, as market confusion and internal rifts deepen simultaneously.

Written by: Zhao Ying, Wall Street Insights

The Wall Street Journal’s Nick Timiraos focused on the policy direction of new Federal Reserve Chairman Kevin Warsh in his first two months in a Monday article, analyzing how Warsh's reform ambitions are igniting a real "civil war" within the Federal Reserve.

Nick Timiraos indicated that while he is pushing five external expert working groups to conduct a comprehensive review of the Federal Reserve's operation methods, he is deliberately maintaining silence on economic prospects and policy directions, leaving his colleagues both intrigued and filled with doubts.

From a broader perspective, Warsh faces a dual core challenge: on one hand, he must persuade a group of officials who have lived through decision-making during a period of inflation exceeding for the past 63 months to acknowledge that the old thinking framework has problems; on the other hand, his "speak less, observe more" style is creating new uncertainties both in the market and internally.

Complicating matters further, the Federal Reserve is set to hold a monetary policy meeting this week, the outcome of which is particularly hard to predict—markets generally expect rates to remain unchanged, but renewed inflation pressures have quietly raised the possibility of interest rate hikes. Warsh's silence strategy is undergoing its most direct stress test at this critical juncture.

Five Working Groups: Vanguard of Reform or Rubber Stamp?

Nick Timiraos stated that Warsh's first major action after taking office was to announce at a dinner on June 15, just before his first monetary policy meeting, the establishment of five external expert working groups to review core topics such as the Federal Reserve's communication mechanisms, inflation framework, and asset holdings. These 15 group leaders include Nobel laureates, former central bank officials, and corporate executives, forming a remarkably impressive lineup, receiving positive evaluations even from many skeptics.

However, the atmosphere at the dinner was not entirely one of applause. Federal Reserve Governor Christopher Waller challenged Warsh, directly asking him: what is the significance of these working groups? His implication was quite sharp—"Tell me who you chose, and I can tell you what conclusions they will reach."

The subtext here is that Warsh is merely using external authority to endorse views he already holds, packaging established conclusions as "independent discoveries." Former St. Louis Fed President James Bullard sided with Warsh, arguing that bringing in credible external figures to drive organizational change is the right path, stating, "His direction is correct." The collision of these two voices reflects the true temperature of the reform within the Federal Reserve.

The "Speak Less" Philosophy: Protecting Judgment or Creating Chaos?

If the working groups are the "clear line" of Warsh's reform, then his deliberate silence is the most striking "dark line" over the past two months.

Nick Timiraos noted that at a congressional hearing, Louisiana Republican Senator John Kennedy attempted to press Warsh: in the face of current inflation, would you choose to maintain, raise, or cut interest rates? Warsh's response evaded all specific options, shifting to discuss the significance of the working groups. This "playing Tai Chi" style left both the market and his colleagues confused.

Warsh has his own logic regarding this: once the Federal Reserve publishes predictions, officials will start to lean towards supporting evidence that backs the predictions while ignoring signals that contradict them, forming a cognitive bias; therefore, remaining silent allows the market to independently form judgments about the economy, rather than listening to the "echo" from the Federal Reserve. He told the lawmakers, investors "have already been complaining that I haven't given them the information I used to," but his stance is, "Go play ball, don't focus on the Federal Reserve." However, Michael Gapen, Chief U.S. Economist at Morgan Stanley, disagreed, believing this logic is untenable—"The assumption that the market will independently interpret data if the Federal Reserve does not comment on it is far-fetched."

Internal Rifts: Waller's Public Counterattack

Warsh's silence strategy faced its first challenge at the dinner, but the real public friction occurred a week later. In a speech to economists in New York, Waller directly criticized this "speak less" approach: "In my many years as an economics student, I have never seen any theory that says not telling people what you are thinking will make their lives better or help the markets run more smoothly." The weight of this statement is self-evident—Waller himself is a Trump-nominated official and was one of the final candidates for the chairmanship, and his public statement signifies that internal divisions can no longer be concealed.

Former Federal Reserve Division of Monetary Affairs Director William English raised practical concerns: a chair who avoids discussing economic prospects cannot explain the committee's decisions to the outside world, nor can they lose the tools to guide the committee's direction. He candidly stated, "Chairman Warsh will eventually find that he must speak about economic prospects." This "eventually" might refer to the press conference after this week's monetary policy meeting—if the Federal Reserve unexpectedly raises rates without clarifying the subsequent path, the market could potentially concoct expectations of a series of rate hikes, at which point Warsh will have to break his silence to "put out fires."

Interest Rate Outlook: Maintain or Raise, Both Dilemmas Are Tests

Nick Timiraos believes that this week’s monetary policy meeting is a test of Warsh's entire strategy. If he chooses to maintain rates unchanged, the question arises: Warsh has repeatedly emphasized that the Federal Reserve will not tolerate exceeding inflation during his two months in office, but if he holds still without providing any triggers for action, the market will naturally question whether these tough statements have any teeth. Waller's comment was quite straightforward: "Staring seriously at inflation, waiting for it to melt away under our fierce gaze, is not an option."

If he chooses to raise rates, the challenge is similarly significant. Without any forward guidance, the market cannot determine whether this is a one-time "preventive adjustment" or the beginning of a new rate hike cycle, panic pricing could emerge at any time. Bullard believes Warsh's decision not to reveal specific operational intentions is wise, but he also differentiated between two situations: explaining the Federal Reserve's response framework in different scenarios is valuable, while overly hinting at a specific action is another matter. The boundary between the two is exactly where Warsh is currently walking a tightrope.

Ultimately, there is an inherent tension between Warsh's reform ambitions and his silence strategy: reform requires persuasion, persuasion requires communication, yet he has chosen the least communicative method to drive the most significant change. Whether this "civil war" concludes as he hopes may well be hidden in the meeting minutes of the coming months.

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