Claudia Sahm is one of the Federal Reserve’s most notable alumni: She is the founder of a recession indicator that bears her name and has accurately predicted most recent economic contractions.
Sahm has concerns about Fed’s ultimate direction: Warsh’s testimony before Senate Banking Committee left him with more questions than answerssays Luckand his answers (though he often took no time to explain them) raised the ire of an economist who worked for the Fed for more than a decade.
“I felt more confused about him [Senate Banking] “I’m getting more rest than before the trial,” says Sahm. Luck in an exclusive interview. “He didn’t give clear-cut answers, and part of that was trying to steer the politics of the hearing, but the fact is he’s going to be the Fed chairman.”
The concerns about Warsh come with a caveat: They are currently taking place in the context of politics. Alarm is relatively high after President Donald Trump persistently tried to influence the path of monetary policy, launching unprecedented attacks on the Fed and its staff in the process.
The Oval Office threatened to fire current Chairman Jerome Powell; A lawsuit was filed againstand another was filed against Executive Chairman Lisa Cook. Add on top of that harsh and public criticism (Trump described Powell as stupid, stubborn, and stupid) and any candidate to replace Powell would be readily accepted.
With this, The content of Warsh’s statement still raised eyebrows in some circles – namely their views on forward guidance. What surprised Sahm most was the certainty of his declaration: “I do not believe in advanced guidance.”
“I almost fell out of my chair,” Sahm said. “Over the last 20 years, the Federal Reserve has moved towards much more transparent communication… there’s an instrument aspect of it, but also the communication, the press conferences have been about accountability and transparency. The Fed chairman is standing there and taking questions from reporters, like answering people he’s opened up to, because it’s not just about talking to the financial markets, it’s about saying, ‘Hey, this is what we’re doing,’ and showing that there are competent people at the Fed, and they think a lot about it, not that and that policy.”
“This progress has taken place at the Fed for more than 20 years, and putting the cat back in the bag will be nearly impossible and likely very misguided.”
Warsh confirmed at his hearing that the press conferences would not be canceled, but all his talk of “regime change” might lead one to assume they would be recast in some way.
Warsh wants to reform some elements of the forward guidance because he thinks it ties the Fed to a predetermined path rather than letting it react to data. He told the Senate Banking hearing: “The Fed is telling the world what its points are going to be, what its forecasts are going to be. So the Fed’s people are holding on to those forecasts for longer than they should.”
Here, Warsh is referring to the dot chart, a chart published by the Fed four times a year that shows where top policymakers each expect short-term interest rates to go; this is one of the most closely watched tools in central banking communication.
“If the Fed waits until it is in session before making a decision, increased deliberation could prevent the central bank from compounding its mistakes,” he added.
Sahm agrees, saying, “They’re perfect.” “They can be improved. So what do you have that’s better than that?”
Sahm emphasizes that explanations for improvement must come with alternatives: “A lot of thought has gone into the models used. A lot of thought has gone into how forward guidance can be improved, and having worked there and knowing the people, there is always a desire to make the organization better. But the bar is very high.”
“You really have to put it in terms of a better model, a better idea, that’s the winner, but it’s very difficult because you have to up your game to make changes.”
Warsh argues that current forward guidance models, introduced during the financial crisis, are not suitable for “normal times.” In a conference to the IMF in April 2025, he outlined: “It may be tempting to move markets with constant incantations from the Fed, but it is unhelpful to the Fed’s deliberations and ultimately its mission. The central bank must find a new comfort in operating without applause and without spectators on the edge of their seats.”
A gradual change
Despite his misgivings about some aspects of Warsh’s leadership, Sahm does not expect him to be the “agent of chaos” that some DC employees might fear.
After all, Warsh knows what it’s like to have the Fed “chew him up and spit him out,” Sahm said — a reference to Warsh resigning from the central bank in 2011. At the time, Warsh was the youngest person to serve on the central bank board, returning more than a decade later after working with legendary investor Stan Druckenmiller.
“The economy is really tough here,” Sahm adds. “First of all, what we’re seeing right now is how Kevin Warsh is going to come into this and how he’s going to step in. How he leads will determine whether we go from dissent and disagreement to chaos on the committee, which really suits the economic situation.”
Some analysts have suggested that the current dispute over the rate-setting Federal Open Market Committee is a form of performance: The three executives who voted against the consensus at the last meeting (regional bank presidents Neel Kashkari, Lorie Logan and Beth Hammack) have been speculated to be taking a beating against a dovish president, while people like Stephen Miran have long advocated for the cuts Jerome Powell has sought.
But the disagreement makes sense now, Sahm said: “Miran, I think, is very serious. He really believes in what it says in his models; just because he’s a governor, he kind of slides to the side. If you replace Warsh with Miran, the chair can’t just fly to the side.”
Sahm adds that Warsh “should have known better” than going by consensus and says playing a longer game on regime change might have been more effective.
“I don’t think he’s an agent of chaos when I disagree with him on a lot of things,” he adds. “I think he wants the Fed to innovate, improve, and execute policy well. That should meet him with the committee where they are and try to change things incrementally. Maybe all we’ve seen in recent months is his campaign to get the job.”
In fact, Warsh, who had been an outward critic of the Fed’s leadership up to this point, framed his feedback as an impetus for the central bank to move forward. Talk about the Hoover Institution (where he previously served as a Shepard Family Distinguished Visiting Fellow in economics) Uncommon Information podcastWarsh said the criticism offered in the aforementioned IMF speech was “more of a love letter than a cold critique.”
He explained: “It’s a love letter because the institution… is important. It’s a love letter because if the institution can reform itself then great things can happen for the institution and for the country. But that means it’s time to get things back on track.”
This story first appeared on: Fortune.com
