For someone who has explicitly called for “regime change” at the U.S. Federal Reserve, Kevin Warsh’s first meeting as chair of the central bank probably shouldn’t have come as a surprise, but by the initial market reaction, it clearly did.
Though much of this week’s meeting focused on potential changes to how the Fed operates, we think the initial proposals made by Warsh are largely superficial. The bigger surprise came in a foundational shift in where the broader policymaking committee sees rates heading—and that is potentially higher.
Up first: New set of blinds
Warsh has made it no secret that he is not a fan of forward guidance or excessive Fed communications. The Fed’s output under its chairs has expanded from essentially nothing during the Alan Greenspan era in the early 1990s, to the first quarterly press conferences under Ben Bernanke in 2007 and later the Fed’s document containing economic and interest rate projections, and then to press conferences at every meeting under Jerome Powell starting in 2019 along with other efforts. By Bloomberg’s estimates, that culminated in over 75,000 words published in 2025 via the Fed’s various publications, compared to barely 300 in 1995.
Perhaps things risked getting to the point where if you wanted to invite Powell to your kid’s birthday party to explain the Fed’s latest rate decision while making balloon animals, you could. Maybe the chances weren’t great that he would show up, but they also weren’t zero.
So sure, there’s probably room to start dialing things back, and Warsh did just that. This week’s policy statement was culled to just 130 words, down from 341 at the April meeting.
But we think there was a bigger change that has perhaps flown under the radar. For the past 25 years or so, the results of the policy vote, both in favor and against, have been published in the statement.
But at the top of this meeting’s policy statement, this appeared: “The Federal Open Market Committee approved the following statement for release by a 12-0 vote” (emphasis ours). While that is indeed a vote result, prior statements referenced the vote tally for or against monetary policy action. We think the distinction is significant.
Our view is that the change was made to reflect the massive reduction in the size and scope of the policy statement and to signal that the change was unanimous and not just Warsh walking in with a chainsaw. But we also think that sentence will be deleted going forward, and that monetary policy voting results will no longer be publicized as part of official policy statements.
If so, that could give Warsh cover. One risk many market participants have flagged was the potential for the Fed chair to cast a dissenting vote on policy decisions, something without real precedent. For example, if a simple majority of the 12-person voting committee votes to raise rates—now a real risk as we’ll discuss shortly—there would be less headline risk on decision days, at least in the immediate aftermath.
Regardless, it appears that Warsh truly wants to put up blinds on the Fed’s windows. Though we don’t see it as a major issue for markets, it could inject some volatility amid the added uncertainty.
Assessing the foundation
And speaking of blinds, the window into the Fed’s thinking on interest rates remains open, at least for now. The big surprise at this week’s meeting, in our view, was the sheer number of policymakers penciling in rate hikes this year with nine of the 18 submissions seeing at least one hike; of those, five saw two hikes and one projected three (Warsh did not submit a forecast as, again, he doesn’t believe in offering forward guidance).
While much has been made about the Middle East conflict’s impact on oil prices, inflation, and the related shift in the market’s pricing of rate hikes from central banks, we have maintained that this was missing the bigger picture and has waned in importance with respect to the interest rate outlook.
As the chart shows, the incoming U.S. economic data has rarely been better, and has had a strong correlation with market-based pricing of rate cut and rate hike expectations. With economic data surprises running near multiyear highs, markets simply see a fundamental case for rate hikes, especially as inflation remains above the Fed’s two percent target and at risk of running even higher if the economy runs hotter.
Rising Fed rate hike expectations may simply reflect strengthening economic data
Note: Economic Surprise Index advanced by eight weeks; 1-year forward rate based on overnight indexed swap data.
Source - RBC Wealth Management, Bloomberg, Citigroup
The chart compares the Citigroup Economic Surprise Index and the year-ahead implied federal funds rate based on overnight indexed swap data since March 2023. The Economic Surprise Index is advanced by eight weeks to facilitate comparison. The surprise index and implied federal funds rate have moved roughly in parallel over the period shown. Both have been trending generally upwards since late 2025.
Getting to work: Task Force Five
For anyone who has worked at a company, they’ve probably seen something like this. Warsh announced five task forces on: communications, the Fed’s balance sheet, data sources, productivity and jobs, and inflation frameworks. He often cited these task forces when asked specific questions and though they featured heavily during his press conference as a key initiative, we think the universal truth of these sorts of reviews will remain true: some things change, most don’t. Additionally, much of what Warsh has proposed already exists at the Fed, or these reviews have been conducted previously.
Our base case, though, is that press conferences are pared back to an as-needed basis and that the Fed’s Summary of Economic Projections—or at least the “dot plot” (the committee’s projections of interest rates)—goes the way of the dodo bird. But really, as we see it, the Fed is bad at forecasting rates. Markets are bad at forecasting rates. Everyone is pretty bad at forecasting rates. The dot plot was a nice-to-have thing, but maybe not a need-to-have. Again, tweaks here and there, but nothing we see as materially moving the needle.
Letting the dust settle
The Fed meeting sparked significant market swings, with the policy-expectations-sensitive 2-year Treasury yield seeing large moves along with stock market declines—but both have already been unwound to varying degrees. Though uncertainty remains high with respect to what comes next, the bar for rate hikes has certainly been lowered.
But if we had to game out for investors what the first year under Warsh looks like, it could look like this. Though he was likely brought in by President Donald Trump to lead the charge toward lower interest rates, we believe those are firmly off the table. Warsh may try to keep hikes off the table, but his reputation has always been as an inflation hawk. Therefore, while he might not vote to raise rates, we don’t think he’ll stand in the voting committee’s way if that’s where the votes fall. And during his press conference, he certainly didn’t stand in the way of the rate hike sentiment that appears to be percolating amongst the committee.
Ultimately, Warsh could see near-term rate hikes as necessary to finally get inflation back down to the two percent target. On top of that, the math next year should work in favor of lower inflation readings as the data will “lap” current high inflation numbers north of four percent. Our current forecast has annual headline Consumer Price Index inflation at just 1.5 percent in Q2 of next year. At that point, he could claim the inflation victory that had eluded Powell to this point and then rally the troops around a more significant easing cycle that is perhaps aided by an AI-induced productivity boom that fuels strong economic growth and labor market strength, but without the inflationary pressures.
We shall see, but this week could have marked a bigger—or at least earlier—shake-up at the Fed than many had been prepared for.