In less than a month at the helm of the Federal Reserve, Kevin Walsh will face his first monetary policy meeting. He has pledged to implement a "regime change" in the communication mechanism of the Fed, vowing to abolish the dot plot and end excessive forward guidance—but reality is harsher than slogans: inflation remains stubbornly high, discussions about interest rate hikes have quietly intensified, and commitments to cut rates are clashing head-on with economic data. Are we seeing a reformer or a diplomat? The answer will begin to emerge on Wednesday.

Written by: Zhao Ying

Source: Wall Street Journal

Kevin Walsh will encounter his first monetary policy meeting as chair of the Federal Reserve in less than a month. This meeting on Wednesday is unlikely to bring any changes in interest rates, but it will serve as the first window for the market to observe how Walsh will reshape the most influential central bank in the world.

Walsh has long argued that the Federal Reserve "talks too much" and has committed to implementing a "regime change" style reform in the central bank's communication mechanism. According to a report by the Wall Street Journal, his core logic is: the Federal Reserve has been constrained by its own communication mechanisms—excessive forward guidance, frequent official speeches, and the controversial dot plot of interest rate forecasts have not only failed to enhance policy effectiveness but have also weakened the central bank's credibility and flexibility.

The most pressing question this week is whether he will refuse to submit the dot plot forecasts and how he will conduct that "must-watch" press conference.

However, Walsh's reform ambitions face real constraints. The war in Iran has driven up energy prices, inflation continues to exceed the Fed's target, and some officials have started discussing the possibility of interest rate hikes—this stands in direct conflict with the rate cut path Walsh promised during his candidacy. Economists admit they have almost no idea what Walsh's next move will be.

Communication Reform: Walsh's First Play

With limited room to maneuver on interest rate policy, reforming the communication mechanism has become the area where Walsh can act the quickest.

According to the Wall Street Journal, Walsh clearly stated at an investor event last year: "Stop talking so much. Think more, speak less." He believes that once Federal Reserve officials release forecasts, they feel obliged to defend them, even if the economic situation has fundamentally changed. This "forecast equals commitment" mechanism actually reduces policy flexibility. He cited 2021 as an example—where the Federal Reserve repeatedly characterized inflation as "transitory," inadvertently raising the threshold for self-correction.

"If you aren't doing well at something, you should do less of it. Those forecasts have always been bad. My own forecasts won't be perfect, so I won't submit them." Walsh made this statement at a meeting at State Street according to a speech draft seen by the Wall Street Journal.

This week, the most watched detail is whether he will refuse to submit dot plot forecasts. This action does not require a vote, as it is considered "inaction" rather than "proactive," but it is enough to undermine the authority of this tool. Former head of the Fed's monetary affairs department Vincent Reinhart stated, "If you don't believe in this project, submitting a forecast is hypocritical."

In terms of the press conference, expectations from the market are equally high. Michael Gregory, deputy chief economist at BMO Capital Markets, wrote in a client report that this first post-meeting press conference will be "must-see television." Key points of interest include: Will the press conference be shorter and more concise? How will Walsh respond to questions regarding inflation consistently staying above target?

The Interest Rate Dilemma: Rate Cut Commitments Clash with Inflation Realities

Walsh promised rate cuts during his candidacy, aligning with the White House's policy preferences. However, he is now facing a completely different economic environment.

According to MarketWatch, economist Julia Coronado expects six Fed officials to incorporate interest rate hikes into their forecasts for this year during this meeting—this is a significant shift, as no officials predicted a tightening of policy in March.

RSM U.S. Chief Economist Joseph Brusuelas characterizes this situation as "the core dilemma at the beginning of the Walsh era": "He won this job by promising rate cuts, and the administration also called for rate cuts. But recent price increases and the spread of inflation have made any rate cuts extremely difficult."

This meeting is virtually certain not to adjust the benchmark interest rate, which currently remains in the range of 3.5% to 3.75%.

There are significant differences in views regarding Walsh's position on interest rates. Richard Moody, chief economist at Regions Financial Corp., believes Walsh may start to lay the groundwork for arguments to restore rate cuts after inflation pressures fade and may reiterate his views on AI-driven productivity growth, thus providing room for low rates. Ben Emons, founder of FedWatch Advisors, believes that Walsh may propose to cool down the economy by reducing the balance sheet as an alternative to raising rates.

Some economists also think Walsh may pivot and accept the possibility of potential rate hikes, distancing himself from Trump's policy preferences.

The Boundaries of "Regime Change": Reformer or Diplomat?

Walsh boldly declared a "regime change" upon taking office, but according to the Wall Street Journal, insiders have revealed that his actual actions so far have been much more moderate than expected—"more like courting than chainsawing."

Since taking office, he has not replaced any senior officials at the Federal Reserve and personally invited Michelle Smith, who served under former chairs Powell, Yellen, Bernanke, and Greenspan, to stay on. One of his initial recruits was speechwriter John McConnell, who previously wrote speeches for President Bush—an intriguing signal: a chairman who wishes for the Fed to speak less is still concerned with the weight of his own words.

Glenn Hubbard, former chairman of the Bush administration's Council of Economic Advisers, commented, "Kevin has outstanding political skills and brings people together."

However, the structural resistance to reform should not be overlooked. The tools that Walsh hopes to discard are precisely those that the 18 colleagues he now needs to win support from have established and defended. Former St. Louis Fed President James Bullard warned that if Walsh remains silent while other officials continue to deliver economic outlook speeches, it could create a "one-sided disarmament"—where the chair relinquishes their voice while "agents" occupy the public discourse.

There are also voices opposing the reduction of communication transparency. Former senior adviser to the Fed William English stated, "This would indeed make them less transparent and less accountable. I don’t like that." Senior global macro investor George Saghir warned, the Fed's forecasting framework provides the market with anchoring, "Take this anchor away? Be careful."

The Greatest Challenge for the New Chair: Between Campaigning and Reform

Walsh's situation is also constrained by an external factor he cannot control: Trump openly pressured the Federal Reserve to cut rates for over a year and vowed that the new chair would fulfill this commitment. Any successor will begin under the shadow of questioning "whether they will serve the White House."

The last Fed meeting had four dissenting votes—Stephen Miran supporting rate cuts and three regional Fed presidents expressing concerns about inflation—indicating that the committee is preparing to defend its independence.

According to the Wall Street Journal, Walsh's call for a new "agreement" with the Treasury last year left some colleagues feeling uneasy, as this wording evokes the historic agreement that established the Fed's independence in 1951.

Edward Jones senior economist James McCann admitted, "We really don’t know. There may be a real surprise next week. I am completely open regarding how he will express himself and position policies."

The Wall Street Journal cited seasoned Wall Street economist Ethan Harris, highlighting the core tension: being an effective campaigner and being an effective reformer are two entirely different things. The influence of the new chair is greatest at the beginning of their term, but reshaping the Federal Reserve's communication style and operational logic relies not on orders, but on persuasion—this is a years-long project.