Kevin Warsh Wants the Fed to Stop Explaining Everything

Kevin Warsh boiled down his advice for the Federal Reserve before an audience of investors last year. “Stop talking so much,” he said. “More thinking, less talking.”

New Federal Reserve Chairman Kevin Warsh.

For more than a decade, Warsh has argued that the Fed should say less. How much a central bank reveals about its thinking shapes mortgage rates, markets and the cost of borrowing for everyone.

Wall Street will parse Wednesday’s meeting, his first as Fed chairman, for any sign of where he’ll take it.

As a Fed governor through the 2008-09 crisis, Warsh had a front-row seat watching Ben Bernanke pioneer two of the central bank’s biggest innovations this century—a far larger holding of bonds and a more systematic practice of explaining its moves. Bernanke was extending a shift Alan Greenspan began in the 1990s, when the Fed first started announcing its rate decisions and signaling where they might head.

Warsh quit in 2011 after souring on the bond buying and has spent the years since arguing the Fed took both innovations too far. Now that he’s in charge, the question is whether he proceeds as a revolutionary, a diplomat or both.

Whatever Warsh hoped to do on interest rates will have to wait. Inflation is running hot after the war in Iran sent up energy prices. The conversation at the Fed has shifted toward hikes, not cuts. It would be a near-impossible setup for a new chairman to override, even if he wished to.

That leaves two ambitious projects, which are moving at different speeds. Shrinking the bondholdings could take years, and communications is where he can move first. Being fenced in on rates, with no fight to wage there, frees him to spend his energy on it.

In Warsh’s view, the central bank has buried itself in its own communication. It produces forecasts that markets fixate on and that box the committee in. Officials give speeches or interviews on every side of every question. Warsh wants the Fed to say less and let markets do more of the work.

With no action expected on rates on Wednesday, the attention will be on him: Will he submit a forecast for rate projections he disdains? How much will he say at a press conference he’d rather not hold?

So far, insiders say his promised “regime change” has been kinder and gentler than feared—more courtship than chain saw. That comes as little surprise to people who have worked with him and know his charming manner.

“Kevin has great political skills—small-p, getting people together,” said Glenn Hubbard, who chaired President George W. Bush’s Council of Economic Advisers when Warsh was a White House economic aide.

He replaced none of the Fed’s senior staff directors on arrival, a pointed contrast with the housecleaning some had braced for. One of his first hires was John McConnell, a speechwriter to Bush, and an early signal that a chairman who wants the Fed to say less still means to make his own words count.

Warsh turned heads by bringing on an author of the Project 2025 conservative policy blueprint into the central bank. But one of his earliest decisions was to personally ask Michelle Smith, who served as chief of staff to past chairs Jerome Powell, Janet Yellen, Bernanke and Greenspan, to stay.

“One might look at an org chart and underestimate her role and influence,” Warsh said in a 2020 oral history, recalling the predawn calls they shared with Bernanke at the height of the 2008-09 crisis. Over three decades, Smith helped successive Fed chairs with differing styles hone the communication apparatus Warsh now wants to prune.

The machinery includes a statement and press conference after each meeting, a steady stream of speeches from up to 19 policymakers and a quarterly set of economic projections—including the polarizing “dot plot” on which each official marks where they think rates should go.

The tool kit has become a global central-banking standard, adopted because openness was judged to make policy more predictable and effective.

The apparatus rests on an idea Bernanke laid out years before he became chairman. What moves the economy, the thinking goes, isn’t the rate the Fed sets at any given meeting but rather the path investors expect it to take. When investors understand how the Fed will react, they do the adjusting themselves—pushing borrowing costs up or down before the Fed has formally moved. The talking, in effect, is the policy.

“Ambiguity has its uses, but mostly in noncooperative games like poker,” Bernanke told his Fed colleagues in 2003. “Monetary policy is a cooperative game. The whole point is to get financial markets on our side and for them to do some of our work for us.”

The break with Bernanke isn’t only intellectual. By Warsh’s own account, Bernanke—newly installed as chairman in 2006—helped get Warsh named to the board that year. Warsh then served as Bernanke’s eyes and ears on Wall Street and Capitol Hill, sometimes introducing himself to lawmakers as an aide to the chairman, underselling his Senate-confirmed job. They parted ways over the bond buying, and Warsh left in 2011.

At his swearing-in ceremony last month, Warsh paid tribute to Greenspan, the chairman who made an art of being inscrutable. Bernanke was neither invited, according to a person familiar with the matter, nor mentioned.

What Warsh wants instead is “to get back into the DeLorean to somewhere in the 1990s, where the Federal Reserve was more closed, where debate was hashed out internally rather than externally,” said Vincent Reinhart, who ran the Fed’s monetary-affairs division under Greenspan.

He points to 2021, when the Fed called the inflation surge “transitory” so often that, in his telling, it had inadvertently raised the bar to retreat.

“If you’re not very good at something, you should do less of it,” he said at a State Street conference a year ago, according to remarks reviewed by The Wall Street Journal. “These forecasts have been abysmal. My dots wouldn’t be perfect either, so I wouldn’t give them.”

Warsh has a favorite image for where the Fed belongs. Since 2015, he has said central bankers should get off the front page and back on “page B12 of the business section.” The rate decision, as he put it last year, should be a dry, six-paragraph item—rates up a quarter or down a quarter, “nothing to see here,” written “by a reporter you never heard of.”

He has thought about this carefully before. After leaving the Fed, Warsh was commissioned to review the Bank of England’s communications. He pushed for more disclosure in some respects—publishing its policy rationale immediately and releasing transcripts after a delay—while cutting its meetings from 12 a year to eight. “Real transparency doesn’t always mean more,” he said while unveiling his findings in 2014. “But it should always mean better.”

Depending on his approach, Warsh could find company on the committee he now leads. Austan Goolsbee said last month that even before he became the Chicago Fed’s president three years ago, “I wasn’t completely convinced of the value of forward guidance, so some fresh thinking in that space would be a good idea.”

The Fed was poised to take up an overhaul of its communications last year, an acknowledgment that the way it does it now is, at best, second-best. The effort ended up on the too-hard pile because none of the alternatives had broad support. “I was never the world’s biggest fan of the dot plot, but you can’t beat something with nothing,” then-chair Powell said in April.

Warsh may have an edge Powell lacked. It is easier for a newcomer to discard a tool than for the person who spent years using it. That’s why the most-watched question Wednesday is the smallest-sounding one—whether he simply declines to submit a dot. It would deflate the exercise without a vote, an act of omission rather than a fight.

Reinhart framed the principle bluntly: “If you don’t believe in the project, then doing the submission is false.”

The case that the central bank talks too much has a powerful witness in Reinhart, who helped Greenspan begin to pull back the curtain and is now chief economist at BNY Investments. He has come to think the effort curdled into something “performative rather than informative.” In doing so, he said, it traded away the mystique that, under Greenspan and his predecessor Paul Volcker, had conveyed its own kind of authority.

But the Fed isn’t a company, and the chairman isn’t quite its CEO. A chair can ask for discipline, but the other governors don’t report to him. Stephen Miran, a Trump administration economist, gave 30 television interviews during an eight-month stint as governor that ended last month—more than double all the other governors combined in that period.

The postmeeting press conference also has its detractors. The ritual forced Powell to lock in his message before the meeting so he could be prepared for the camera. Its defenders see the discipline as a feature. It supplies a measure of accountability the Fed once did without. Scrap the briefing, and the Fed would have to find another way to answer to the public it serves.

That mattered less in the 1990s, when a flood of cheap goods and labor into the global economy held inflation down and made central bankers’ jobs look easy. It matters more now, with the Fed under political siege from both the right, which wants it to bend to the White House, and the left, skeptical of its closeness to Wall Street.

Pull back the projections and the press conferences, and “that does make them less transparent and less accountable. And I don’t like it,” said William English, a former senior Fed adviser.

Bond investors warn that the apparatus is holding up more than it appears. Markets trust the Fed not to lurch at every wiggle in the data because the projections give them an anchor, said George Saghir, a veteran global-macro investor. That calm has quietly lowered borrowing costs across the economy. “You take that anchor out? Look out.”

Moreover, Warsh may not be able to buy the quiet he wants, said former St. Louis Fed President James Bullard. If Warsh goes quiet while his colleagues continue to give economic-outlook speeches, a kind of unilateral disarmament could take hold where the chair forfeits the bully pulpit. Going silent, Bullard said, “creates surrogates for the committee, and the surrogates do all the talking.”

Routine local engagements by the Fed’s regional presidents used to get little media attention, Bullard said, until the 2008-09 crisis sparked intense interest in all things Fed. Now, a wire-service reporter watching a Rotary club lunch in Springfield puts the headline instantly in Singapore.

Four dissents at the Fed’s last meeting—Miran wanting a cut, three presidents worried about inflation—revealed a committee already braced to guard its independence.

Warsh’s own words haven’t always helped. His call for a new “accord” with the Treasury Department last year reaches back to the 1951 agreement that secured the Fed’s independence. Some colleagues wish he had picked a less loaded term for what they hope is an overdue tidying of operational lines.

Reducing the bonds on the Fed’s balance sheet is another test of that patience. The committee might tolerate trims but not the deep reduction some conservatives want. One Fed governor dismissed a return to the pre-2008 system as “massively inefficient and stupid.”

A drawdown means the Fed would absorb fewer Treasurys, leaving more for the market to swallow. Doing that while long-term yields are already climbing risks driving them higher still. “It took 18 years to create this balance sheet problem, and we won’t be able to fix it in 18 minutes,” Warsh said at his April confirmation hearing.

Warsh’s instincts have yet to be tested by markets. He wasn’t at the Fed for the 2013 “taper tantrum,” when imprecise communications about the Fed’s intentions to dial back stimulus sent bond yields rising sharply, or for the 2019 funding-market strains that ambushed a Fed that had shrunk its balance sheet only to find it had drained too much cash from the system.

Episodes like those illustrate why the institution tends to reshape its reformers as often as the reformers reshape it. “There is a big difference between being an effective campaigner and being an effective reformer,” said Ethan Harris, a veteran Wall Street economist.

A new chair can refuse a dot or trim a statement in an afternoon. Remaking how the Fed talks and operates is the work of years, won less by decree than by persuading colleagues to make his cause their own.

Even so, a new chair’s leverage is never greater than at the start. On communications changes, “Kevin Warsh would be wise to come in and say right away that he wants to do something,” Bullard said. “Otherwise, he’ll probably get stalemated.”

Write to Nick Timiraos at [email protected]