Forward guidance disappearing? Former Fed Vice Chair: “Kevin Warsh’s Fed” may bring adjustments in three key areas.

Rich Clarida, PIMCO's Global Economic Advisor and former Vice Chair of the Federal Reserve from 2018 to 2022, believes that under the leadership of Kevin Warsh, the nominee for Fed Chair by President Trump, the Federal Reserve will become the "Warsh Fed," introducing significant adjustments to its policy framework in areas such as forward guidance, balance sheet management, and credit allocation.

Clarida recently told the media that Warsh’s view on the U.S. economy is consistent with the Fed’s stance in December last year, which may support at least two 25-basis-point interest rate cuts, bringing the federal funds rate down to a range of 3%-3.25%. He noted that Warsh has recently criticized the Fed for being "too far behind" and for cutting rates too slowly.

Before joining the Fed, Clarida served as PIMCO's Global Strategic Advisor from 2006 to 2018. Prior to joining PIMCO in 2006, he worked as Assistant Secretary for Economic Policy at the U.S. Treasury Department and served as Chief Economic Advisor to two U.S. Secretaries of the Treasury. He believes it is reasonable for the Fed and the Treasury Department to discuss balancing policy objectives. Warsh previously proposed establishing a new "Treasury-Fed Accord" to provide a framework for both departments to collaboratively reduce their balance sheets.

Clarida believes that investors may notice that the biggest change under the "Warsh Fed" compared to its predecessors will be in communication policy. Clarida stated that it is possible for monetary policy to operate without forward guidance, and under Warsh’s leadership, the Fed may significantly reduce detailed guidance on future interest rate paths.

Three Directions of Policy Adjustment

Clarida expects the Fed to adjust its policy framework based on Warsh’s past criticisms. The three potential areas of adjustment he listed include: forward guidance, balance sheet management, and credit allocation and mortgage-related sectors.

According to an article by Clarida, Warsh has extensively written about Fed policies over the past 15 years and expressed concerns about the size and composition of the Fed’s balance sheet. Warsh also questioned the central bank’s reliance on forward guidance—arguing that it is excessive and sends confusing signals about future monetary policy—and criticized the Fed’s failure to anchor its policymaking and communications in rules designed to reduce discretion meeting by meeting.

Warsh recently advocated for establishing a new "Treasury-Fed Accord," which, depending on the specifics, could enable the Fed, Treasury Department, and housing agencies Fannie Mae and Freddie Mac to collaborate in reducing the size of their balance sheets.

This proposal is noteworthy because the Fed, after ending its quantitative tightening program in December last year, is currently expanding its balance sheet again through reserve management purchases of short-term Treasuries. Under Warsh’s plan, the new framework might also involve the Fed gradually reducing the duration of its balance sheet to levels far below the current ones, reverting to practices prior to the global financial crisis.

Rate Cut Expectations and Inflation Considerations

Regarding interest rate policy, Clarida noted that Warsh recently criticized the Federal Reserve for being 'too far behind' and reducing rates too slowly. Therefore, he is likely to support at least implementing the two 25-basis-point rate cuts indicated in the December 2025 Fed economic projections (the "dot plot"). These rate cuts have largely been priced in by the market and will bring the policy rate, i.e., the federal funds rate, down to a range of 3%-3.25%.

Clarida believes that under PIMCO's baseline scenario, Warsh will be able to secure the minimum seven votes required among the 12 members of the Federal Open Market Committee (FOMC) to implement two 25-basis-point rate cuts this year, and possibly even a third cut. This would bring the target range for the federal funds rate down to 2.75%-3%, which aligns with the median estimate of the FOMC's current neutral rate.

However, after these two or three rate cuts, Clarida believes Warsh may adopt a more cautious stance, depending on the inflation outlook.

He pointed out that, according to Warsh’s understanding, long-term bond and mortgage yields are influenced not only by the Fed's policy rate but also by inflation expectations. If indicators of inflation expectations rise significantly above current levels, he may be more hesitant about further rate cuts. At present, long-term inflation expectations remain consistent with the Fed's 2% inflation target.

A Significant Shift in Communication Policy Is Expected

Investors may notice that compared to the Federal Reserve under the previous three chairs—Powell, Yellen, and Bernanke—the biggest difference with a "Warsh-led Fed" lies in the Fed’s communication policy.

Clarida noted that based on Warsh's writings after leaving the Fed, he may significantly reduce detailed forward guidance on future interest rate paths, especially during "normal" periods like the current one where rates are not at the zero lower bound.

Warsh can cite precedents: both Volcker’s eight-year tenure and Greenspan’s first 17 years successfully led the Fed in achieving price stability and supporting robust growth without providing the kind of forward guidance on future policy rate paths that exists today. However, financial markets and Fed observers have grown accustomed to—and critics might say dependent on—the Fed’s “open mouth operations.” Transitioning to a new communication mechanism could prove quite bumpy.

Clarida emphasized that Warsh will need to collaborate with the Fed’s committees to advance reforms. He pointed out that there is upside potential for the U.S. economy this year, noting that "a tech capital expenditure boom is real," while also mentioning other favorable factors such as tax cuts and foreign investment in plant and equipment.

Editor/Stephen