Kevin Warsh prepares to take the reins at the Federal Reserve. How policy might change.

Key takeaways

• Kevin Warsh returns to lead a Fed that has been under political pressure, with questions about independence.
• He wants the Fed to say less about future rate moves and rely less on tools used during crises.
• Warsh is also challenging how the Fed measures inflation and uses economic data.

Kevin Warsh, the incoming chair of the Federal Reserve, returns to the central bank with an ambitious reform agenda and a central question: How independent will he remain from President Donald Trump, who nominated him?

Warsh served at the central bank during the 2008 financial crisis before leaving in 2011. He spent more than a decade outside the Fed, working in the private sector and academia. The former Morgan Stanley banker and White House economic adviser was appointed to the Fed’s Board of Governors at age 35, making him one of the youngest officials in the central bank’s modern history.

The Senate confirmed Warsh to a 14-year term on the Fed’s Board of Governors this week, and voted separately to install him as chair for a four-year term, setting the stage for his return to lead the institution.

He has described this moment as a “regime change,” with plans to scale back the Fed’s balance sheet, reduce reliance on crisis-era tools such as quantitative easing and forward guidance, and rethink how the institution communicates policy.

Warsh takes over at a time of unusually intense political pressure on the Fed, after Trump has repeatedly calling for lower interest rates.

Interest rate decisions are made by the Federal Open Market Committee, where the chair holds one vote among 12 members. While the role carries significant influence, policy changes require support from a majority of the committee.

In an unusual move, Jerome Powell said he would remain on the Fed’s governing board after Warsh assumes the chairmanship, citing what he described as Trump’s unprecedented attacks on the central bank’s independence. Although his term as chair is ending, Powell will remain as a Fed governor through Jan. 31, 2028.

As Warsh prepares to take over, he has not detailed specific changes, though his past comments suggest where his approach could differ on how the Fed presents its policy decisions.

Over the past two decades, the Federal Reserve has steadily expanded how it communicates policy to financial markets.

The central bank began holding regular press conferences under then‑Chair Ben Bernanke in 2011. A year later, it introduced the Summary of Economic Projections, including the so‑called dot plot showing individual policymakers’ interest rate expectations for the end of coming years.

Those changes made communication itself a policy tool. By signaling where rates were headed, officials sought to shape borrowing costs and broader financial conditions. Markets often began pricing in decisions well before they were formally announced.

Warsh has been highly critical of that approach, particularly the use of the dot plot. “The Fed tells the whole world what their dots are going to be, what their forecasts are going to be,” he said during his Senate confirmation hearing.

He said publishing forecasts can lead policymakers to rely too heavily on their own projections. “Well, the Fed’s human,” he said, adding that officials risk holding on to those forecasts longer than they should.

Warsh also argued that detailed guidance on the future path of policy can create expectations the Fed later feels pressure to meet, potentially undermining its credibility.

Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said Warsh has not outlined specific changes to existing tools or whether he would continue publishing the dot plot or holding press conferences after policy meetings.

Warsh has pointed to changes in the Fed’s internal decision-making process.

He has said he would prefer decisions to come together closer to the meeting itself, allowing policymakers to respond to the latest economic data rather than locking in positions in advance.

That could lead to a less-structured process. Warsh has criticized what he sees as a culture in which decisions are largely settled ahead of time and disagreement is limited.

“I tend to favor messier meetings than some, where people don’t show up with rehearsed scripts, but we can have a good family fight,” he said at the Senate committee hearing.

Warsh has also questioned the data the Federal Reserve relies on and how it uses it to guide policy decisions.

The Fed’s preferred inflation gauge, the Personal Consumption Expenditures Price Index, is generally viewed by policymakers as a broader and more flexible measure than the Consumer Price Index, which is based on a fixed basket of goods. Both are widely used to track price changes across the economy.

Warsh has said neither fully captures underlying inflation dynamics. During his confirmation hearing, he pointed to alternative measures such as “trimmed mean” inflation, which removes the most extreme price changes. He said such measures can “take out all of the tail risks” and better reflect broader price trends.

Deutsche Bank economist Justin Weidner said in a note to clients that trimmed measures can help filter out short-term volatility.

“Inflation is measured imprecisely,” Weidner wrote, adding that excluding large price swings in smaller categories “can provide a clearer picture of the trend.” He added that the approach depends on the assumption that “the inflation prints out in the tails are in fact noise and thus not informative about the trend.”

Even so, Warsh has warned that policymakers place too much weight on backward-looking data. Inflation measures reflect past conditions, and monetary policy operates with a lag. He has said this approach risks leaving the Fed behind changes in the economy.

The Federal Reserve’s balance sheet is another area where Warsh differs from recent leadership.

“The Fed balance sheet has played a particularly, I think, unhelpful role in helping the Fed achieve its dual mandate,” he said during his confirmation hearing.

Under Powell, the Fed has relied on large-scale purchases of Treasury securities and mortgage-backed bonds to influence longer-term borrowing costs. Warsh has argued those tools have been used too broadly.

He wants the Fed to hold fewer bonds, which now exceed $6 trillion, and rely more on interest rates to guide the economy.

Any effort to unwind those holdings would likely affect financial markets, because more bonds would hit the market, pushing bond prices lower and yields higher.

David Kelly, chief global strategist at J.P. Morgan Asset Management, has said the Fed’s bloated balance sheet has “distorted capital markets,” while noting that reducing it could be difficult in practice given fiscal and regulatory constraints.

Shrinking the Federal Reserve’s balance sheet could have direct implications for mortgage rates and housing affordability.

As the Fed reduces its holdings of Treasury securities and mortgage-backed bonds, more of those assets must be absorbed by private investors.

That increase in supply puts downward pressure on bond prices and pushes yields higher.

Long-term yields, including the 10-year Treasury and mortgage-backed securities, are a benchmark for mortgage rates.

When those yields rise, borrowing costs for homebuyers typically move higher as well.

The effect is particularly pronounced in the mortgage market, where the Fed has been a major buyer of mortgage-backed securities. As the Fed's support fades, investors will demand higher yields to hold those assets.

As a result, mortgage rates could remain elevated, dampening housing activity.