Warsh cycle, Part II
Mapping the contours of Chairman Warsh’s velvet revolution
Big changes afoot
While many still doubt that new Fed Chairman Kevin Warsh, is a hawk, in recent days markets have begun to comprehend that the Fed’s choice is increasingly hemmed in by 63 months of above-target inflation, a renewed surge in energy prices, accelerating economic activity, and signs that bond vigilantes are finally stirring. A single month’s favorable volatility in CPI has given the doubters hope for another month’s reprieve from hikes, but realism suggests that only the timing and pace are in question.
Amid this last-minute scramble of people learning to trade without “forward guidance” from a Nick Timiraos-brokered leak, attention to the much bigger changes afoot at the Warsh Fed has fallen by the wayside after a brief spike in Google/LLM searches of the announced co-heads of the Chairman’s five task forces on reforming Fed operations. This report delves into what the composition of the five task forces — as well as Chairman Warsh’s personal advisors — tell us about the “velvet revolution” he intends for the Fed, including what recommendations I expect from the task forces. But I’ll begin with a brief Bayesian updating of my expectations for this week’s Federal Open Market Committee (FOMC) meeting.
