US Fed chair vows reforms as central bank signals rate hikes on horizon

US Fed chair Kevin Warsh announced plans Wednesday to review five areas of Fed operations as he seeks to put his stamp on the US central bank. (EPA Images pic)

WASHINGTON: US Federal Reserve Chair Kevin Warsh on Wednesday vowed wide-ranging reforms at the central bank, as its rate-setting committee held rates steady but projected a rate hike by year-end to counter surging inflation.

The Fed decided to hold rates steady at 3.5% to 3.75% for the fourth consecutive meeting, with the vote being unanimous for the first time in a year.

Speaking to reporters after his first meeting in charge, Warsh vowed to “deliver price stability” to Americans, with inflation currently at a three-year high.

“Persistently high prices are a burden for the American people, but the recent past need not be prologue,” he said, acknowledging that inflation has been well above the Fed’s 2% target for years.

In their Summary of Economic Projections (SEP), policymakers raised their forecast for the year-end interest rate, signalling that they expected one rate hike by the end of 2026.

Policymakers said inflation remained “elevated”, partly due to supply shocks caused by skyrocketing energy prices triggered by US President Donald Trump’s war on Iran.

Trump has launched an unprecedented assault on the Fed’s independence, opening a criminal probe into Warsh’s predecessor and attempting to unseat another governor in his quest for lower interest rates.

Shortly after Wednesday’s meeting, the Republican said he found it “hard to believe” the Fed would raise rates but said he backed Warsh, whom he nominated to the position.

‘Ready to raise’ 

The Fed has a dual mandate to keep inflation to its long-term 2% target while also maintaining maximum employment.

On Wednesday, the signals were clear that the central bank considered the labour market to be healthy and was fully focused on lowering inflation.

In the SEP, Fed policymakers raised their year-end projection for the Personal Consumption Expenditures price index inflation from 2.7% to 3.6%.

“The Fed’s ready to raise rates, it’s clear,” Diane Swonk, chief economist at KPMG, told AFP. “The committee is really moving towards the issue of price stability being the number one issue.”

The SEP was based on input from 18 of 19 policymakers, with Warsh withholding his forecast.

The new Fed chair has said he wants to reduce the amount the central bank communicates about its decisions.

During his briefing with reporters Warsh cut a polite figure, determined not to say more than he intended and to shift expectations on how much markets should expect to hear from the Fed chair.

“What we’ve given markets is a new chapter for the central bank – some fresh thinking,” he said, indicating he wanted financial markets to stop trying to interpret the Fed’s reaction to data and to parse that data on their own.

Wide-ranging reforms

Warsh announced plans Wednesday to review five areas of Fed operations as he seeks to put his stamp on the US central bank.

He said he would name task forces to formulate reforms on Fed communications, its balance sheet, its use of data sources, productivity and employment, and the Fed’s inflation frameworks.

The task forces were expected to deliver findings by the end of the year, he said.

Swonk said Warsh’s tone indicated that he realised that he needed “buy-in” from other Fed leaders to implement the changes he wants.

“This is not an edict, it’s a collaborative process,” she said.

Wednesday’s statement was shorter than normal and removed forward guidance on the direction of the interest rate, which has been a constant in recent years.

Pao-Lin Tien, an economics professor at George Washington University, said that moving towards more opaque monetary policymaking could mean inflation expectations are less anchored.

“Our fear would be that without the forward guidance, inflation expectations might become a little bit more volatile,” she said.