Fed Chair Kevin Warsh Has Held Rates Steady in Back-to-Back Meetings Since Taking Over in 2026. What His Cautious Start Means for Markets.

Kevin Warsh is sending mixed signals to the market.

The new Federal Reserve Chair, who took the position in May, came to the central bank sounding like a monetary policy hawk. That is, he has emphasized the Fed's mandate for low and stable inflation rather than its mandate to achieve maximum employment.

Federal Reserve Chair Kevin Warsh. Image source: Federal Reserve.

And understandably so, as headline inflation was 3.5% over the past 12 months (as of June, the latest reading available). Even when you exclude volatile food and energy items, prices rose 2.6% over the past year. That's well above the Fed's long-term target of 2%. Meanwhile, the labor market has remained resilient, with unemployment at a very low 4.2%, so it doesn't need support from the Fed now.

Since he took over as Fed chief, Warsh has presided over two meetings of the Federal Open Market Committee, the Fed's interest rate-setting committee. And despite elevated inflation and calls for the Fed to raise rates in response, the committee held its target rate steady at both.

Normally, with inflation persistently above the Fed's target level and the economy near full employment, the Fed would be aggressively hiking rates.

Task forces instead of rate hikes

Yet, Warsh seems to be taking a very cautious approach. Instead of raising rates, he's promised a "regime change" in the way the Fed operates. To that end, he's established five task forces to examine and improve how the Fed communicates to markets, how it uses its enormous balance sheet, how it reads and processes economic data, how it assesses the impact of new technologies like artificial intelligence, and how it understands and responds to the drivers of inflation.

But those task forces are not expected to release their findings and plans until the end of this year. In addition, Warsh is considering reducing the number of meetings of the Fed's interest rate policy committee each year. It now meets eight times a year.

All of that suggests the Fed may be on hold longer than markets have been expecting and may delay any interest rate moves until those task force results are in. That's barring some new spike in inflation, of course. That means markets might not have the headwind of higher interest rates this year, which should be good for stocks.

Of course, there's a flip side to that. Sometimes when bond investors are displeased with the Fed or with U.S. fiscal policy, they vote with their feet, so to speak, and sell Treasury securities. That drives yields, which move in the opposite direction of bond prices, higher.

The 10-year Treasury yield recently rose to 4.74%, far above where it began the year, on concerns that the Fed is not moving effectively to contain inflation. The five-year Treasury yield is also up sharply in recent months. Important borrowing rates, such as mortgage rates and car loan rates, are tied to those yields, so they're rising, too, which could prove an obstacle to economic growth.

Clearly, Warsh's job is a complicated one. Meanwhile, investors will be left guessing what's next for the central bank.

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