How Kevin Warsh has set out to remake the Fed

Federal Reserve Chairman Kevin Warsh’s first big announced changes point toward a quiet revolution, with task forces set up to rethink virtually everything done to set policy and the approach used to get there.

Following his first meeting at the helm Wednesday, Warsh outlined the plan — a sprawling, ambitious endeavor entailing five task forces that will utilize resources and experts within the Fed and from the outside.

The reviews amount to a comprehensive examination of all the areas that define modern monetary policy. No chair in recent history has launched a project that has matched the ambition of this one.

Their job will be to examine communications, data the Fed uses to measure the economy, the view on inflation and its causes, the impact of technology such as artificial intelligence and the size and composition of the Fed’s $6.7 trillion balance sheet and the potential path to cutting the holdings.

The task forces will “start with first principles, ask hard questions, examine current practice, consider alternatives, and ultimately propose next steps for policymaker consideration,” Warsh said.

“Each task force will serve an objective shared by everyone in the system, shared by everyone around that table that I sat with over the last couple of days: a Federal Reserve that is clear-eyed about its mission, fit for purpose, and focused on the future,” he added.

In announcing the task forces, Warsh was emphatic and deliberate.

But gone was the harsh rhetoric he has used to denounce the central bank over the past year.

Last July, Warsh, in a CNBC interview while he was campaigning for the job, called for “regime change” at the Fed and cited a “credibility deficit” caused by “incumbents” at the institution. In its place were comments about how “incredibly impressed” he was with what he’d seen in his first weeks on the job and how the meeting “exemplified the very best of the Fed’s traditions.”

What once looked like a potentially rancorous atmosphere inside the institution quickly become collegial as Warsh looks to carry through a fundamental rethink of how it does business.

“What I think we’re seeing is regime change, but in a velvet glove,” said Scott Clemons, chief investment strategist at Brown Brothers Harriman. The task forces “basically are going to review and maybe revise all the working aspects of Fed practice, from communications to data sources to the way they approach the balance sheet to the inflation framework. There’s a lot of potential regime change there.”

Warsh’s decision to take the positive view came as little surprise to Fed veterans, several of whom spoke in favor of the direction the new chairman charted.

“All those who’ve been in the Fed know that the way change operates is through just what he did, which is create task forces to build consensus,” former central bank Vice Chair Roger Ferguson told CNBC. “There are some things that one can get rid of that I think would be helpful and there are others where maybe he must be careful.”

Former Cleveland Fed President Loretta Mester served on a communications subcommittee during her tenure that ran from 2014 to 2024, part of a nearly 40-year career at the central bank. She’s familiar with prior efforts the Fed made to enact change that perhaps weren’t quite as codified as the approach Warsh is taking.

“All the things he’s looking at are things that the Fed has looked at. But he’s organizing the work, and I think he’s putting it on a faster than typical timeframe for some of these projects that the Fed has undertaken before,” Mester said. “So, I think this is all good to be studying. Of course, we’ll have to see what then the recommendations are, and what changes he wants to make.”

One of the most visible areas Warsh has changed is communication.

The post-meeting statement eschewed much of the boilerplate language of its predecessors and instead offered a bare-bones view of what the committee decided and how it views current economic conditions. In format, the statement began with the actual rate action — unchanged, as expected — a callback to how the Fed used to formulate its statements prior to March 2009. Since the financial crisis-era period, the Fed had been starting the statements with an assessment on the economic state of affairs.

There also will be a study of how the Fed gauges inflation after being above its goal for five years following the erroneous “transitory” call in 2021 and 2022. Artificial intelligence and its impacts also will be in focus, as will a comprehensive view of the metrics that the Fed is using to gauge the economy, with an expected look at further using data and analytics for guidance.