Warsh to focus on supervision, regulation and other Fed functions

• Key insight: Federal Reserve Chair Kevin Warsh said monetary policy has dominated his focus during his first months at the helm of the central bank, but he said that doesn’t mean he’s forgotten about the Fed’s other duties.
• Expert quote: “The head of the Fed needs to be head of all parts of the Fed.” — Federal Reserve Chair Kevin Warsh

The Federal Reserve’s new chair said he has been overly fixated on monetary policy during his first months in office, but that is about to change.

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Late Thursday night, Fed Chair Kevin Warsh said he intends to spend the next 100 days focusing on the other parts of the central bank, including supervision, regulation and payments processing.

“The head of the Fed needs to be head of all parts of the Fed,” Warsh said, noting that only about a quarter of the central bank’s staff is focused directly on matters of monetary policy.

Warsh’s comments came during an on-stage conversation with International Monetary Fund Managing Director Kristalina Georgieva at an IMF event in Bangkok, Thailand. 

Warsh attributed his outsized focus on monetary policy on the exigencies of the current economic moment as well as the voluminous outside attention that interest rates always attract from financial markets. 

Shortly after joining the Fed in May, Warsh announced five task forces to examine different parts of the institution’s approach to monetary policymaking, including its balance sheet policy, its use of data, its understanding of productivity and jobs, its assessment of inflation and its communication strategy. 

Warsh said he would take a similar “first principles” approach to other Fed functions, seeking to understand their core objectives to devise the best strategies for them going forward. He noted that all parts of the Fed’s operations were critical to its overall credibility.

“Whatever any part of the federal reserve does if they slip up, if they stumble on supervision or on payments, that reflects on our institutional credibility,” Warsh said. “So [for] my next hundred days, I’m going to try to give equal focus to those other parts of the business, because they matter too.”

“When you take over a position like this you need to lead all of it and you need to love the institution enough across everything they do to ask first principles instead of ‘Well, we do it this way because that’s how we’ve always done it,'” he added. “That’s not good enough.”

Warsh’s broadened focus comes at a time of substantial change within other parts of the Fed. After pursuing a series of sweeping regulatory changes, Fed Vice Chair for Supervision Michelle Bowman is spearheading a restructuring of the central bank’s supervisory structure. Meanwhile, Fed Gov. Christopher Waller has discussed the transformative potential that artificial intelligence has for the future of payments. 

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On the topic of monetary policy, Warsh said little about what the Federal Open Market Committee might do later this month, citing his well-established aversion to forward guidance.

Warsh’s on-stage appearance came on the heels of a pair of key inflation readings from September, the Bureau of Labor Statistics’ consumer price index and producer price index, both of which came in higher than expected. Using components of CPI and PPI, the personal consumption expenditures index — the Fed’s preferred measure of inflation — is expected to come in around 3% later this month.

For his part, Warsh indicated that he was not surprised by the high readings or any other economic data released since the last FOMC meeting.

“Broadly over the month or so that’s transpired since then, the world has broadly conformed to our expectations,” he said.  

The FOMC increased its benchmark interest rate by a quarter percentage point last month on the grounds that inflation has been too high for too long and is not moving quick enough toward the Fed’s 2%. 

Based on the FOMC’s quarterly anonymous forecasts and various speeches in recent weeks, the majority of the committee’s participants expect to raise interest rates again before the end of the year. The lingering question has been whether that will translate into one quarter-point hike or two.

The Fed chair’s comments come on the eve of the Federal Open Market Committee’s two-week communications blackout period for FOMC participants that precedes the committee’s next meeting on Oct. 27 and 28.