Warsh taps 2 veteran Fed economists as advisers in policy shift

Federal Reserve Chairman Kevin Warsh has appointed two veteran central-bank economists as advisers on policy and analysis, a move that could reshape how the Fed interprets inflation data at a time when price growth is running at more than double its 2% target.

"Warsh's decision to create task forces to re-examine the Fed's approaches could result in decisions that lean dovish," Citigroup research analysts wrote in a note to clients, pointing to the flexibility implicit in the new chairman's analytical structure.

Daniel Covitz and Eric Engstrom, both longtime Fed staff economists, will assist Warsh on policy and analysis, according to people familiar with the matter. The appointments come as the personal consumption expenditures index — the Fed's preferred inflation gauge — accelerated to 4.1% in May, the highest since April 2023, with core PCE at 3.4%. Wall Street now prices at least one rate hike by year-end, while the 10-year Treasury yield has fallen nearly 0.1% this week to levels last seen in April as oil prices hit new postwar lows.

For Warsh, who has so far resisted President Donald Trump's calls for lower rates, the adviser appointments offer a path to potentially recalibrate the Fed's analytical framework without an abrupt policy pivot. With the Iran war drawing to a close and vessels moving again through the Strait of Hormuz, some analysts predict the new chairman will pursue a more dovish stance — a shift that, if realized, would mark a significant departure from the hawkish posture that has defined the Fed's recent approach.

The two economists bring deep institutional knowledge to Warsh's inner circle. Covitz, who served as a senior Fed staffer across multiple rate cycles, and Engstrom, whose expertise spans monetary policy analysis and financial stability, represent a choice of technical experience over political alignment. Their appointments suggest Warsh intends to build an analytical framework grounded in the Fed's own research infrastructure rather than external political pressure.

Rate path and market pricing

The Fed's benchmark rate has remained elevated as inflation has proved stickier than anticipated. Treasury Secretary Scott Bessent said Wednesday that inflation is moving in the right direction, adding that "now that we are, I believe, on the other side of this conflict, gas prices will come back down, inflation will come back to target." The reference to the winding down of the Iran conflict points to a potential easing of supply-side pressures that have kept headline inflation elevated.

The S&P 500 rallied 16% over April and May — a gain that has occurred only one other time outside of post-recession bounces — before giving back about 4% from its all-time high this month. The retreat reflects growing uncertainty about the rate path as markets digest the implications of Warsh's new analytical approach.

What the advisers mean for policy

The last time the Fed brought senior staff economists into the chairman's advisory structure in a comparable way was during the transition between the Greenspan and Bernanke eras, when the central bank was grappling with how to communicate its forward guidance more effectively. That period preceded a shift toward greater transparency, including the introduction of explicit inflation targets and regular press conferences.

If Warsh's task forces conclude that traditional inflation gauges overstate price pressures — a view he expressed skepticism about before his appointment — the Fed could find analytical cover to hold rates steady or even cut, despite headline PCE running above 4%. The Citigroup analysts noted that the market "seems to underappreciate the flexibility implicit in appointing task forces to consider the drivers and measurement of inflation."

Consumer spending data offers some support for a more measured approach. Bank of America CEO Brian Moynihan said consumers "are still spending on vacations and things like that, which is good for America. They still go out to eat, which is also good." Inflation-adjusted incomes rose 0.3% in May after declining 0.5% in April, suggesting the consumer remains resilient even as prices rise.

The next Fed meeting will be closely watched for any shift in the statement language that might reflect the new advisory structure's influence. Markets will parse the decision for signs of whether Warsh's team is moving toward a more dovish interpretation of the inflation data or maintaining the current hawkish posture.

This article is for informational purposes only and does not constitute investment advice.