What to expect from Kevin Warsh’s first meeting as Fed chairman

By Bryan Mena, CNN

Washington (CNN) — The Federal Reserve is expected to keep interest rates on hold this week. But for investors, economists and anyone hoping for lower borrowing costs, the bigger question is what comes next under new Chairman Kevin Warsh.

His predecessor, Jerome Powell, took the podium after every monetary policy meeting to explain the latest rate decision and take questions from reporters in an effort to be transparent with Americans. Investors and Fed watchers became accustomed to Powell’s style of guiding markets, but now there’s a new playbook to learn.

Wednesday’s post-meeting news conference, scheduled for 2:30 p.m. ET, will give Warsh his first chance to introduce himself — and his approach to monetary policy. Wall Street is eager to learn how he views the outlook for interest rates now that a US-Iran agreement has reduced the risk of an oil-driven inflation shock from the monthslong conflict in the Middle East.

Warsh’s first public appearance as chairman marks the start of what he has described as a “regime change” in how the central bank operates. That could include fewer news conferences and a rethink of the Fed’s longstanding practice of publishing officials’ quarterly economic projections, which are also due at this meeting.

“Warsh has made it pretty clear he wants to change a lot of what is going on in terms of the system and the structure at the Fed,” Jose Rasco, chief investment officer for the Americas at HSBC Global Private Banking and Wealth, told CNN. “The biggest shift would be with the projections because the market has gotten so used to them.”

The question of rate hikes

Inflation is rising, but that doesn’t automatically mean the Fed needs to hike interest rates.

Central bankers are looking at what’s driving price pressures and whether they are likely to persist. The prevailing view has been that supply shocks are typically one-off events that don’t create sustained inflation, so the Fed should “look through” them, as Powell noted in March. That means officials expect inflation to ease over time without the need for rate hikes, especially if the conflict in the Middle East is fully resolved.

“Waves may rock the boat momentarily, but they rarely cause lasting damage,” Richmond Fed President Tom Barkin said at a May 21 event in Raleigh, North Carolina. “Raising rates to weaken demand doesn’t address the root cause behind supply shock-driven inflation. It doesn’t free up trade routes, reopen factories or melt ice.”

Because monetary policy works with a lag, the Fed needs to be convinced that high inflation will persist over the coming year before raising rates. That’s why officials are looking for evidence of a self-perpetuating inflation cycle known as “second-round effects,” in which higher prices feed into wages and create further price gains. So far, there is little evidence that such a dynamic has taken hold.

For example, Americans aren’t demanding higher wages to offset the higher cost of living, according to Bureau of Labor Statistics data, which would further push up inflation. And, according to business surveys, many companies are hesitating to jack up prices to deal with elevated energy costs because consumers have become highly price sensitive.

To filter out noise and gauge where inflation may be heading, officials look at core measures of inflation that strip out volatile food and energy prices. Those readings have been relatively milder in recent months, helping the Fed stay on hold for now. Officials are also keeping a close eye on people’s expectations for inflation, particularly in the next five to 10 years, as they can be self-fulfilling if they drift higher. While short-term expectations have shot up, according to various measures, longer-term expectations have moved up more gradually.

“Expectations determine what will happen to prices,” said Eugenio Alemán, chief economist at Raymond James.

‘Regime change’ underway?

While Warsh won’t be able to singlehandedly deliver the rate cuts President Donald Trump has long demanded — the Fed chairman is only one vote on a committee of 12 — he has made it clear it won’t be business as usual at the Fed.

Warsh has already hired two conservative policy veterans as temporary Fed advisers, according to a person familiar with the matter — neither of whom have direct experience in monetary policy or banking regulation. One of them is Paul Winfree, who worked in the first Trump administration on domestic policy and was the author of the Fed section in Project 2025, the conservative blueprint to transform the government.

The other person Warsh hired is Daniel Heil, a fellow at Stanford University’s Hoover Institution, where he was a colleague of Warsh’s, working on economic policy, and former adviser in Jeb Bush’s 2016 bid for president.

Warsh has said there’s “plenty of deadwood” at the Fed, suggesting he could overhaul the central bank’s workforce of about 3,000 based in Washington, DC. Powell last year had already begun a process to trim headcount to coincide with similar efforts across the broader federal government.

Warsh has also proposed for Fed officials to view inflation differently by focusing on alternative measures of inflation, known as “trimmed-mean averages.”

During his confirmation hearing in April, Warsh said those measures capture “what’s the underlying inflation rate, not what’s the one-time change in prices because of a change in geopolitics or a change in beef.”

With new advisers in place and talk of “regime change” already underway, Wednesday’s news conference is set to offer the first clear signals of how far Warsh intends to go in reshaping the US central bank.

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