So on June 17, Kevin Warsh chaired his first meeting of the FOMC. The rate decision itself was unremarkable. It was a unanimous hold of the target range at 3 1/2 to 3 3/4 percent. Everything else, though, marked a regime shift. The first signals were in what the Fed chose to say and not to say about policy. The statement shrank from 341 words to 130. The easing bias was dropped, the dot plot flipped from showing one cut to a projected hike this year, and in the presser, the Chair offered virtually no forward guidance other than an emphatic focus on price stability. The second set of signals were about the institution itself. Chair Warsh announced 5 task forces to review the Fed's communication practices, its balance sheet, its data sources, its inflation framework, and the impact of AI and other technologies on productivity and jobs. To me, the message was unmistakable. This was the opening act of a very different Fed.
And I'll say upfront, I've long believed that Kevin Warsh is the right choice for this moment. The Fed needed a chair who understands how to sustain institutional credibility in this environment when the system is under unprecedented stress. Someone who knows when and how to deploy its most potent tools, who has the savvy to build consensus within the Federal Reserve System and across political parties. I should also mention upfront that at PGM, we predicted out of consensus that the Warsh Fed will hike the policy rate 75 basis points this year. The June meeting deepened our conviction about the direction of travel for policy. But the timing, the pace, the magnitude, the duration of the policy shift, those remain open questions for us. And that's why I wanted to invite Jim Bullard to the show. Jim is one of the most consequential monetary policymakers of the past two decades. As president of the St. Louis Fed from 2008 until 2023, he served on the FOMC through the financial crisis, through COVID and the worst inflation outbreak in 40 years. He famously argued in late 2021 that the Fed was behind the curve while the committee was still calling inflation transitory. Jim is now the Dean of the Daniels School of Business at Purdue University. It's a change of address that has not dulled his appetite to say sharp things about the institution he served. Thanks for joining the show, Jim.
Thanks very much for having me. Looking forward to it.
So Jim, let's start with the most basic interpretive question we've had. One meeting under Chair Warsh, 130-word statement punctuated with clear emphasis on price stability, a dot plot that flipped towards hikes this year, 5 announced task forces and virtually no explicit policy guidance in the presser. Markets have read the meeting outcome as hawkish. The Fed funds curve now prices about 35 basis points of hikes before year-end. Are markets correct?
I think they are. I think the committee has moved in a more hawkish direction. I've long felt that the chair position is not as powerful as people think. The chair can't just dictate policy. That chair has to maneuver within the middle of the committee, and the committee has clearly shifted in a hawkish direction. I think with core PCE inflation running over 3%, that's beyond a red line for the committee. And you know, they're still hoping I think that inflation will come down, but it's looking less likely without action. So I think the market has this about right.
OK, so Jim, let me press you on the character of underlying inflation. The committee revised up its year-end core PCE projection by 60 bps to 3.3% and core PCE is no longer projected by the FOMC to hit 2.0% within its forecast horizon. I read this as a recognition of structurally hotter demand growth powered by drivers that are not highly sensitive to policy rates or energy prices for that matter. I'm talking about AI capex and the downstream lift to wealth-driven consumption. And this demand-side boom is colliding with a set of supply-side shocks that are not mean-reverting and are not independent of each other. So tell me what's your diagnosis? What's driving inflation? How persistent is it? What's it going to take to get back to 2.0%?
Well, it's probably going to take rate increases. I think the committee was too high last year, and they did point to the weakening, apparently weakening labor market in the second half of last year and that was grounds for the 75-basis-point reduction that occurred last year. But as we got into 2026, it's become clearer that the administration's policies are pro-growth. The labor market has firmed up compared to what was expected, and that has left only the inflation side of the mandate being missed. I think it says a lot that the committee expects, even under a good policy, to only hit 3.3% on core PCE inflation at the end of this year, and that will be many years in a row of misses. So they've misplayed the endgame here a little bit.
I think we did a good job in 2022 and 2023 and inflation came down dramatically, but they haven't been able to get all the way to the 2%. So now they're going to have to redouble efforts. And I think the committee did have to take a hawkish stance here at this June meeting, although markets will test that and see if the committee's really willing to go to an actual rate increase as opposed to threatening rate increases.
You mentioned that the inflation readings that the Fed looks at most closely have now overshot the target for many years running, more than five years running. What does that suggest to you about the timing, the pace, the magnitude of any rate hikes that we see this year?
Well, the end-of-year projection, 3.3%, already incorporates the idea that you'll get relatively benign readings through the rest of this year. As the analysis I've seen said, a .2 on monthly readings, you know, through the rest of the year, it strikes me that if a couple of those don't come through, then you'll get even higher core PCE reading at the end of the year. So, I think there's a lot of upside risk here that might force the committee's hand.
And usually in this situation, acting sooner rather than later is a good idea because if inflation does rise to 3 1/2 percent or above 3 1/2 percent, it's going to take a long time to get that down. And you would have to have a more concerted tightening campaign. So the committee is at a crossroads here. And, you know, I think the sentiment has clearly shifted toward more worries about inflation.
Would that also suggest, Jim, that since the labor market does appear to be stabilizing, maybe even accelerating, the committee could in a sense afford to move earlier and faster without risking downside slippage relative to the employment target?
Yeah, I think one of the things that's being said is that the, you know, this is more like the Greenspan Fed and I sometimes would cite Greenspan as being a little more, a little quicker to move and a little more impulsive and maybe more willing to take a surprise move. Kevin Warsh has approvingly cited the Greenspan era and that would be a change, I think, from the post-Greenspan era where especially under Chair Yellen, Chair Powell, we got a lot of very well-telegraphed moves.
Even Bernanke, the Bernanke tightening cycle, you know, extremely well telegraphed. And maybe that's not always exactly the best policy. And so if Kevin wants to go more in the direction of, hey, the latest data have come in pretty hot and we're just going to move right now, even though we didn't really prepare markets as much as the previous chairs would have, you know, maybe that's what's in store here, but it would be a more volatile outcome for traders in fixed income for sure and even across the board.
OK, so let's talk about forward guidance. Chair Warsh has argued for years that the Fed overcommunicates, that forward guidance creates a sort of circularity in which markets price the policy path the Fed has signaled, which drains the information value out of the yield curve and potentially ties the committee's hands in ways that produce worse policy outcomes. You've spent 15 years inside a committee that built its operating model around forward guidance and state-contingent projections that are designed to shape expectations. So I'll just put it to you directly. Is Chair Warsh doing the right thing? And what does it cost the Fed to give up guidance in terms of front-end volatility, the transmission of policy to the economy and global spillovers? What are the trade-offs?
Yeah, I can give some examples. So I am kind of sympathetic to Kevin Warsh that he says, well, you telegraphed so much that the committee felt trapped at times that they had to deliver even in cases where the data had not really come in the way that it was projected to come in. And I think in that situation, I think the committee did make some mistakes.
One was at the December meeting in 2016. At that meeting, the committee raised the policy rate and then projected further rate increases during 2017. It got a bad reaction, especially to the projected increases in 2017. And that led to, everyone's forgotten this now except for maybe this audience remembers this, but there was a lot of volatility. January, February, March, and then everything was corrected in March. So it can all be managed. But that was sort of an unforced error, I think.
And then again in 2018, the December meeting, you had the Fed having projected all year that they were going to do 4 rate increases and then the data wasn't really cooperating in November. In the run-up to the December meeting, I advocated there that, why don't we just, why don't we just delay this till January and see how this plays out. But the committee, I think that's a clear case where the committee felt we have to follow through and they did follow through.
And then you got a very volatile Christmas and Jay Powell came out in January at the AEA meetings and basically changed the path of policy at that meeting or at that event. And then that committee went on a different path in the first half of 2019. So everyone's forgotten these things. But I think those were cases where it's sort of overcommunication, overplanning and not enough reaction to the, you know, not enough attention to the idea that the data didn't really corroborate what the committee was hoping for. And you probably should have at least delayed. I think Greenspan would have delayed at that meeting, that 2018 meeting, just said, wow, we're not quite sure the data is consistent, so we'll just wait till January. I think we could have done that there and avoided a lot of volatility in markets.
