The new chairman of the Federal Reserve, Kevin Warsh, made his debut with the shortest FOMC statement in history, refusing to fill in the dot plot and establishing five major reform working groups, sending hawkish signals that shook the market— the dollar recorded its largest single-day increase of the year, and interest rate hike expectations surged. However, the phrase "the working group will study" has almost become a cliché, with ambitions for reform existing alongside a policy vacuum. Under Warsh, uncertainty at the Federal Reserve may arrive more frequently than before.

Written by: Xu Chao

Source: Wall Street Journal

Kevin Warsh's first appearance as chairman of the Federal Reserve was marked by the shortest FOMC statement since 2007 and five reform working groups spanning the core functions of the Fed— the intention for reform is clear, but whether it can be fulfilled remains a concern for the market and academia.

This Wednesday, the Federal Reserve voted unanimously 12 to 0 to maintain the federal funds rate target range at 3.5% to 3.75%, holding steady for the fourth consecutive meeting. In his first press conference, Warsh announced the establishment of special working groups in five major areas: communication mechanisms, balance sheet and operational framework, alternative data sources, productivity and employment, and inflation framework, while reiterating that the 2% inflation target remains unchanged and refusing to provide personal interest rate projections in the dot plot.

The market interpreted these signals as a hawkish surprise, with the 10-year breakeven inflation rate rising to its highest since May last year, the dollar recorded its largest single-day gain of the year, and federal funds futures indicated significantly increased expectations for interest rate hikes this year.

However, Warsh's debut was not without controversy. During the press conference, he used "the working group will study" as a reason to dodge questions directly related to recent policy debates. Stephen Douglass, chief economist at NISA Advisors, bluntly stated that Warsh was "quite evasive," while Ian Katz, managing director at Capital Alpha Partners, pointed out that “delegating to the working group” had almost become a sort of "cliché" at that day’s press conference.

This situation reveals the inherent tension in Warsh's strategy: the minimalist statement and refusal to participate in the dot plot allow him to send a strong independent signal to the market; however, the most challenging reform topics, such as the inflation framework, data methodologies, and balance sheet paths, have all been handed over to still-forming working groups, which will not provide a structural report until at least fall. During this transitional period, the uncertainty of the Federal Reserve's policy logic will rise temporarily.

Minimalist Statement: Warsh's First Business Card for Reform

The significant reduction in the length of the FOMC statement is the most direct signal of a change perceived by the market.

The statement was compressed from the usual 341 words to about 130 words; George Pearkes of Bespoke Investment characterized it as the shortest FOMC statement since 2007 (excluding the emergency rate cuts at the early stage of the pandemic). The entire statement consists of only three paragraphs, covering interest rate decisions, economic assessments, and inflation evaluations, deleting a lot of the traditionally used forward guidance expressions, ending with the line "the committee will achieve price stability," and omitting the usual complete voting list at the end.

Warsh admitted that this adjustment was a conscious decision, stating that the statement is "a bit shorter, a bit simpler, and removes some old expressions." This is consistent with his previous public stance: the Federal Reserve has been speaking too much in the past.

Michael Feroli, chief economist at JPMorgan, pointed out the contradiction in a report to clients: "Given this short statement focused on controlling inflation, it is puzzling why the Fed did not raise rates today.” Dario Perkins of TS Lombard noted that shrinking forward guidance is relatively easy—"it was designed for an era where rates are close to zero"—but compressing the Fed's balance sheet or shifting to a completely new modeling framework presents "a bigger challenge," and those challenges were not fulfilled this week.

Five Working Groups: Mechanism for Reform or "Shield for Evasion"?

The broad coverage of the five working groups announced by Warsh shocked the academic community, especially concentrating on two areas: scrutiny of government data sources, and a comprehensive review of the inflation framework.

Regarding data issues, Warsh stated that the monthly non-farm payroll report, which the Fed has historically relied on, is merely "a historical echo," which is clearly different from the Fed officials' usual endorsement of government data.

On the inflation framework, the establishment of special working groups has sparked market doubts about the stability of the 2% target—despite Warsh clearly stating that the target remains unchanged; he immediately added that he is concerned about "the numbers to the left of the decimal point," implying that an inflation rate of 2.9% may be acceptable to a certain extent, leaving doubts about the stringency of target execution.

Warsh stated that the working groups are currently still in the "recruiting and identifying personnel" stage and will formally launch in the "next few weeks," with the expectation to provide preliminary structural reports this fall and aim to complete most work by the end of the year.

Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives, stated that the working groups will lead economists to continuously question the Fed's decision-making logic until they are completed, "placing everything under doubt and scrutiny for some time, creating high uncertainty about Fed policy." She also pointed out that the working groups' purpose—whether to improve monetary policy or to push forward a "reduce transparency agenda"—is yet to be determined.

Dot Plot and Inflation Target: Direction Set, Boundaries Still Blurred

While Warsh refused to fill in personal interest rate predictions, 18 colleagues participated in the dot plot, and collectively moved towards the interest rate hike direction. According to Bloomberg, the average predicted rate for the year rose from 3.24% to 3.83%, with committee members generally expecting to raise rates before any cuts.

On the inflation target, Warsh clearly stated that the 2% target remains unchanged, dispelling speculation that the Fed quietly plans to raise the target to 3% — the latter would create a larger room for rate cuts desired by the Trump administration. However, Warsh's comments about "the numbers to the left of the decimal point" left a gray area at the market level.

This divergence is also quite intriguing in terms of communication: while Warsh himself intends to abandon forward guidance, his colleagues used the existing dot plot mechanism to clearly convey a hawkish direction. Warsh expressed his expectation that the communication working group will ultimately propose "some carefully considered adjustments" to the Summary of Economic Projections (SEP).

Market Impact: Hawkish Surprise Triggers Rapid Repricing

After the FOMC decision was announced, the market reacted quickly and dramatically.

The 10-year TIPS yield rose to its highest since May last year, financial conditions tightened rapidly, and federal funds futures indicated significantly increased expectations for interest rate hikes this year. The dollar recorded its largest single-day gain of the year, contradicting the Trump administration's clear goal of pushing for a weaker dollar, putting additional pressure on global markets.

The previous decline in oil prices could have provided Warsh with space to avoid making strong statements, but he chose not to take that route. Analysts believe this sends a key signal to the market: Warsh does not intend to be the executor of the president's will for rate cuts.

For investors, the current landscape means that during this transition period where forward guidance fades and the conclusions of the working groups are not yet out, uncertainty regarding the Fed's policy path will persist. The market may need to get used to—under Warsh's new communication framework, surprises from the Fed might be more frequent than ever before.