In his first Federal Open Market Committee (FOMC) meeting as Fed Chair, Kevin Warsh held rates steady and announced the formation of five task forces to review the Fed’s operations. He also stripped forward guidance from the policy statement entirely.
The FOMC voted to maintain the federal funds rate at 3.5% – 3.75%, citing solid economic activity despite elevated uncertainty tied in part to the conflict in the Middle East. Warsh called the committee’s commitment to price stability “unambiguous and unanimous.”
The National Association of Realtors® (NAR) Chief Economist Lawrence Yun noted that mortgage rates can change even if the Federal Reserve’s policy does not change.
“The longer-term interest rates, including mortgage rates, are partly determined by future inflationary pressures and not directly by the Fed’s short-term interest rate policy changes,” Yun added. “Should the inflation rate subside, mortgage rates can also dip.”
Forward guidance is out
With his new position at the helm of the Fed, the most immediate signal of change came in dropping the forward guidance. The policy statement released Wednesday was shorter and simpler than previous iterations—and the forward guidance, the language typically used to signal the likely direction of future rate moves, was absent.
“We agreed (forward guidance) was not well-suited to the current policy conjuncture,” Warsh said in his opening remarks during a press conference following the FOMC meeting.
When pressed on whether that would increase volatility for markets and reduce transparency for the public, Warsh pushed back, arguing that forward guidance had effectively made the Fed blind to the market signals it most needs.
“Financial market prices are probably the most important source of information to guide central bankers, but when all the financial markets are doing is reflecting back what we’ve said, then we’re taking the most important source of information, and we’re being blind to it,” he added. “I’d like us to create a system where those blinders come off.”
Five task forces
Warsh announced the appointment of independent task forces in five areas: Fed communications, balance sheet policy, data sources, productivity and jobs, and inflation frameworks.
The communications task force will build on internal discussions underway since last summer and is expected to propose changes, including to the Summary of Economic Projections.
The balance sheet task force will review the benefits and risks of the current ample reserves regime and the composition of the Fed’s balance sheet, as well as assess alternative frameworks for the conduct and operation of monetary policy.
The data task force will evaluate new information sources and consider methodological changes to improve data gathering.
The task force on productivity and jobs will survey the pace, reach and economic impact of new general-purpose technologies, including AI, and explore the implications for the Fed in pursuit of its employment and inflation mandates.
The last task force—on inflation frameworks—will examine the drivers of inflation, first principles and weigh the full range of ideas for delivering price stability in a changing economy.
Warsh said he expects task force work to begin within the next couple of weeks, with initial findings emerging in the fall and most concluding by year’s end. He emphasized that no decisions would be outsourced.
Economic projections
The Summary of Economic Projections (SEP) released Wednesday showed median projections for real GDP growth of 2.2% this year and 2.3% next year. Total PCE inflation is projected to run at 3.6% in 2026 and 2.3% in 2027. The unemployment rate is projected at approximately 4.3%. The median participant sees the appropriate federal funds rate at 3.8% at year’s end and 3.6% at the end of next year.
On the rate path, Warsh noted the committee was evenly divided: roughly half of his colleagues saw rates at the current level or lower through the end of the year, while the other half saw rates moving higher. As the 19th voter, Warsh did not submit a projection.
The next FOMC meeting is scheduled in six weeks, for July 28-29.
