The Warsh Fed's new approach

Less than four weeks after being sworn in as chairman of the Federal Reserve, Kevin Warsh left no doubt that the way the central bank shapes its policies and communicates is now going to be very different from the last 15 years.

The big picture: Warsh is already executing on his longstanding view that the Fed has been over-explaining, over-signaling and overly focused on fine-tuning the economy for years. Investors will need to quickly wrap their heads around this new regime.

• Out: Forward guidance and detailed descriptions of how the central bank is interpreting incoming data.
• In: Simpler policy statements, tighter (and maybe fewer) press conferences, little guidance as to what comes next and task forces to rethink broader aspects of how the Fed works.

State of play: In new projections released alongside yesterday's policy statement, 9 out of 18 top Fed officials indicated that at least one interest rate increase would be appropriate this year. That was enough to drive stocks down and bond yields up.

• Warsh, consistent with his long critique of that forecasting exercise, didn't submit one of his own.
• In his news conference, he also declined to spell out what the likelihood is of a rate hike this year, how he interprets incoming inflation data or what economic developments would prompt a rate increase.

Zoom in: In characterizing how the FOMC is thinking about rate hike prospects, Warsh said that "there's a range of views" on inflation dynamics.

• "No resolution or conviction, but we'll be meeting again in six weeks. I think we're going to know more then. And I think that my colleagues are very attentive to incoming developments between now and then."

Between the lines: Warsh is aiming to bring the Fed back to something closer to a Greenspan-era policy framework, in which the central bank aims to say more by speaking less often.

• It implies that the Fed will more often act without the kind of long, gradual buildup of press conference hints, formal projections and set-piece speeches that have been the norm since the early 2010s — and embraced by other leading central banks.
• That, in Warsh's view, will make the central bank more nimble and focused on delivering appropriate policy, rather than getting locked into its own pre-commitments.

Yes, but: It also implies more days when financial markets are whipsawed.

• Traders will have less to go on to map each week's economic developments to the direction of interest rate policy, which implies more surprises.
• It's not just that Warsh declined to provide a projection for policy in the coming months. He also didn't offer much to go on in terms of "if X happens, we would take Y policy action."

Reality check: It's not in the Fed's mandate to worry about financial market volatility.

• And there is reason to think that the more expansive apparatus of central bank communications that built up in the aftermath of the 2008 financial crisis is less constructive in non-crisis moments.
• Most significantly, the Fed was likely late to combat the 2021-2022 inflation outburst because it had become so locked in on forward guidance anticipating low rates far into the future.

What they're saying: "Although it's complicated times, these are normal times," former Philadelphia Fed president Patrick Harker tells Axios. "We're not in a crisis. The question becomes, when '08-'09 happens, or a pandemic hits, are you going to keep the language that short? That's what the test is."

• In light of the uncertainty over the direction of inflation resulting from the Iran war, "at this point the Fed can't give a lot of forward guidance," Harker adds. "This I agree with Warsh on. When there's this much uncertainty, you can't do it."

The bottom line: Don't count on the Warsh Fed to deliver the same kind of step-by-step guide to the direction of its policies. It will instead favor big-picture statements and quicker, more decisive moves.