New Federal Reserve chairman launches sweeping review of US monetary policy

WASHINGTON — Federal Reserve Chair Kevin Warsh opened a new era of U.S. monetary policy on Wednesday as officials voted to leave interest rates unchanged, even as inflation remains well above target. At the same time, the central bank launched a broad review that could reshape how it sets policy and communicates with the public.

Warsh, who assumed leadership last month, quickly made his mark by guiding a unanimous agreement on a shortened policy statement that removed forward guidance on the near-term path of interest rates. While the statement avoided signaling future moves, new quarterly projections showed a divided outlook among policymakers, with nine of 19 officials anticipating at least one rate increase by the end of 2026.

The streamlined statement marked a shift toward a more restrained communication style, reminiscent of earlier eras of central banking, and reflected Warsh’s view that extensive forward guidance can limit flexibility and confuse markets.

“I can’t give you any forward guidance about what we’re going to do next,” Warsh said at his first post-meeting press conference. “The good news is we’ll be meeting in six weeks.”

The policy statement also highlighted Warsh’s emphasis on productivity and supply-side factors. It noted that productivity growth and capital investment remain strong, while acknowledging that inflation is still “elevated relative to the Committee’s 2% goal.” It attributed some of the price pressures to supply shocks, including energy-related disruptions.

Despite the generally hawkish tone, the framing suggested that improving productivity and easing supply constraints could eventually help bring inflation down and create room for lower interest rates over time.

Analysts said the changes were significant for the central bank’s communication strategy.

“The changes to the policy statement were profound,” said Thomas Simons, chief U.S. economist at Jefferies. He noted that the statement was significantly shorter and contained limited forward guidance, signaling a shift toward two-way risks in policy direction.

Market participants also pointed to the change in tone as a departure from recent Federal Reserve practice, which had relied heavily on detailed signaling following the global financial crisis.

Rick Rieder, chief investment officer of global fixed income at BlackRock, said investors would need to adjust to reduced guidance from the Fed, though he viewed the shift as potentially positive if paired with stronger data analysis and institutional improvements.

However, markets reacted cautiously. Stocks sold off following the announcement, while short-term bond yields rose sharply as investors reassessed the likelihood of near-term rate cuts.

The decision to hold rates steady, combined with projections showing a meaningful number of policymakers open to future hikes, has reduced expectations for easing in the near term. Some investors now believe the Federal Reserve could raise rates as soon as September.

“Monetary policy is tightening and fiscal policy is poised to tighten at the turn of the year,” wrote Neil Dutta, head of economics at Renaissance Macro Research. He warned that tightening financial conditions could signal growing risks to economic expansion.

The updated projections also showed inflation expected to slow more sharply in 2027, with rates projected to stabilize near current levels before easing modestly in 2028.

Warsh announced a comprehensive internal review of the central bank’s operations, including its balance sheet strategy, communication practices, data sources, and policy framework for inflation and employment. The review reflects his long-standing view that the Fed should operate as a leaner and less complex institution.

“What typically happens is people take the path the central bank already travels,” said Vince Reinhart, chief economist at BNY Investments and a former Fed staff member. “He is saying let’s walk back the path and reconsider earlier decisions.”

Despite expectations of eventual easing, the projections suggest any future rate cuts would be gradual and far more limited than those sought by political leaders. Warsh emphasized that the central bank remains committed to its 2% inflation target.

“The Committee will deliver price stability,” the statement said.

For now, the Federal Reserve appears to be entering a period of tighter communication, cautious policy decisions, and uncertainty over the next direction of interest rates as Warsh reshapes the institution’s approach to monetary policy. -Reporting by Howard Schneider; Additional reporting by Michael S. Derby and Ann Saphir; Editing by Andrea Ricci and Paul Simao/Reuters