How Long Can the Fed Watchfully Think?

The Federal Reserve (Fed) decided to leave rates unchanged in Kevin Warsh’s second meeting as Chair in July. Unlike last month’s decision, this one was not unanimous; the vote was 9-3. This was the first time in ten years that there were three dissents in the same direction regarding a policy decision.  

A few key things stood out to me: 

Short, but not sweet. The FOMC announcement was short, just like the June statement, and again did not include forward guidance (See figure 1 for dot plot as of June just for reference). As I said after Warsh’s first FOMC meeting, his new, less transparent approach – including the absence of forward guidance - is likely to result in more confusion and market volatility, at least in the near term. The announcement only provided a vague reassurance that “the Committee will deliver price stability.” During the press conference (yes, it looks like we’ll keep getting those at least through year-end because they were already scheduled), Chair Warsh repeatedly pointed out that for more than five years, inflation was elevated and that was not acceptable. When asked what tools the Fed would use to lower inflation, Warsh was less than clear. He said raising interest rates could be part of the response, but he would not say it would be used in isolation. When asked about the fact that much of this inflation is being caused by supply shocks, Warsh said the Fed is focused on understanding what impact these shocks are having, whether there are second-order effects and how broad they are. He said the shocks of course make the Fed’s job harder. Warsh would not characterize the Fed’s decision to hold rates at current levels as a “pause.” He said he would characterize it as a “rigorous review of the economic situation” and a review of “the big hard questions.” 

No direction home. Warsh seemed to take a victory lap about not issuing forward guidance after his first Fed meeting, saying, “We haven’t done much in 42 days but markets have done a lot.” He said markets have made decisions, markets have made judgment calls responding to real economic data; Warsh said the Fed is trying not to interfere with the market signal. He said, “the Fed doesn’t need to be the center of attention.” He said the Fed needs to “observe market reaction to developments direct and unfiltered.” However, when asked what markets were telling him, Warsh didn’t give a clear answer, saying that he thinks the Treasury market is telling him that the economy is in good shape. As for broader, potential changes in this ‘new chapter’ for the Fed: no news on the five task forces. Warsh said he will check in soon.  

The ‘North Star’. Warsh said the Fed’s ‘North Star’ is to get policy right. He said the two parts of the mandate are equally important, but the US is doing considerably less well on prices. In terms of transmission mechanisms of monetary policy, he was quick to point out that different tools work through different channels (rates work through lending and credit channels and maybe confidence channels in foreign exchange while the balance sheet probably works through other channels like signaling and portfolio balance). Warsh also noted that an important economic development -- what he described as “the most striking feature of the economy” -- is the strong growth of business investment. I should note that this is largely AI-related business investment. Warsh seemed to be making excuses for the inflationary pressures caused by AI capex-related demand. He said it is supporting manufacturing output and that it is laying the groundwork for future growth.  

‘Warshisms’. As an aside, I was struck by some of the language and wondered if Warsh could have had a career in advertising, coining some catchy terms during the press conference. One was “the historic problem with data dependence is the data and the dependence.” (This reminded me of an old AP History essay topic from my high school days, “The Holy Roman Empire was neither holy nor Roman; discuss.” When discussing the Fed’s two mandates, he said “we have no legislative orphans here.” And the Fed is doing “watchful thinking” rather than “watchful waiting.” I couldn’t help but wonder if this might come across as somewhat glib and might ultimately hurt credibility with markets. 

Where to from here?  

In a speech before the black out period began, Chris Waller, a member of the Board of Governors of the Federal Reserve System, admonished that “sternly staring at inflation until it melts before our withering gaze is not an option.” That seems appropriate to consider as we ponder what appears to be Warsh’s approach to monetary policy, which seems akin to speaking loudly and keeping a big stick at home in the closet. 

The markets have spoken. The 30-year Treasury yield rose to its highest level since 2007. As someone who was around for the Global Financial Crisis (GFC), there is not much about 2007 that I would want to replicate. The rise in yields on the long end is happening, in my opinion, because markets think the Fed should have hiked rates. Put simply, the bond vigilantes have come out to protest the Fed’s laissez faire approach. Not surprisingly to me, stocks – especially longer duration stocks such as tech names – sold off as yields rose. 

Looking ahead, our next important installment from the Fed will be Chair Warsh’s speech at Jackson Hole, which could give us more insight into the changes he will implement as a result of the task forces underway. I will be particularly interested in his plans for the balance sheet. This will be followed soon after by the FOMC September meeting. My base case is that the Fed will raise rates about two times this year, including at the September meeting. 

Figure 1: Federal Reserve summary of economic projections (June 17, 2026) 

Source: Federal Reserve