Rajan Enters Warsh’s Fed Rebuild

The Big Picture
Raghuram Rajan is now part of the Warsh Fed story.

The Federal Reserve on Thursday named the leaders of five outside-led task forces to review the conduct of monetary policy, and Rajan will co-lead the Balance Sheet Policy group with Karen Dynan and Jeremy Stein. That makes the former RBI governor central to the Fed’s most market-sensitive institutional review: the size, structure and operating consequences of a $6.7 trillion balance sheet. The other groups will examine communications, data, productivity and jobs, and inflation frameworks.

The signal is that of a regime. Chair Kevin Warsh is moving quickly to externalise the Fed’s internal review process, bringing in former central bankers, academics and market-facing thinkers to challenge the institution’s assumptions. The task forces will operate independently with Fed staff support and are expected to produce findings for the FOMC; Reuters reported that Warsh hopes to receive recommendations by year-end.

The FOMC minutes, released Wednesday, show why that review matters. The June hold was unanimous, but the inflation debate was not benign: a few participants saw a case for raising rates at the meeting, several did not see current policy as restrictive, and many saw scenarios in which persistent inflation would warrant further firming.

The near-term Fed debate is still CPI first, July second, September third. But the medium-term debate has widened. The Warsh Fed is no longer just changing the tone of the statement; it is putting the balance sheet, communications architecture, data inputs and inflation framework back on the table.

Today’s Board

On Constitution Avenue: Rajan Gets the Balance-Sheet Seat

The Rajan appointment is the most important part of the Fed task-force announcement for markets.

The balance sheet is where monetary policy meets market plumbing. The task force will examine the costs, benefits and institutional implications of the Fed’s current balance-sheet regime, which means the ample-reserves framework, Treasury and bill purchases, standing repo facility, reserve demand and the boundary between policy implementation and financial-stability backstops all move into the review zone.

Rajan’s presence gives the review an external-stability lens. As RBI governor in 2013, he dealt directly with capital-flow stress, currency pressure and the market consequences of Fed spillovers. Fed’s balance-sheet choices no longer transmit only through domestic reserves; they also affect dollar liquidity, repo usage, Treasury-market depth and emerging-market funding conditions.

Warsh’s design is also politically useful. By assigning the review to outside experts across ideological and technical camps, he can argue that the Fed is not simply shrinking the balance sheet for optics or defending the status quo for institutional comfort. The risk is that the process raises expectations for major change before the FOMC has consensus on what should change.

FOMC Minutes: A Unanimous Hold, Not a Dovish Hold

The June FOMC minutes deserve their own read because they show a Committee that held rates while discussing higher-rate scenarios.

Participants generally said inflation had increased further and remained well above the 2% objective. They attributed the pressure to tariffs, supply-chain disruptions tied to the Strait of Hormuz, and strong demand linked to AI-related investment. Several also said price pressures had become more broad-based, including transportation, airfares, petrochemicals and agricultural inputs.

The labour-market side was less threatening. Participants generally saw unemployment as stable and payroll growth broadly consistent with labour-force growth. Many said the labour market was not currently a source of inflationary pressure, or that wage growth was consistent with inflation moving back toward 2%. That is the argument for patience after the soft June payrolls report.

But the policy section was hawkish in scenarios. All participants supported holding the target range at 3.50%–3.75%, yet a few saw a case for raising rates at the meeting. Most discussed benign scenarios in which inflation would fall back toward target, but they also discussed scenarios where inflation stayed elevated because of AI demand, Middle East conflict or tariffs; in those cases, almost all said some firming would likely be warranted.

The most important line for markets is the split over year-end rates. Many participants saw the appropriate year-end funds rate within or slightly below the current range, while many others saw it above the current range. That is not a Committee ready to pre-commit, but it is a Committee with a real hike faction.

Fed Communications: Williams Keeps the Reaction Function Open

John Williams did not close the July door, but he also did not push markets toward it.

The New York Fed president said he expected energy prices to ease over the next six to twelve months and declined to say what the Fed should do at the July 28–29 meeting. His more useful point was about the reaction function: the minutes, in his view, captured a range of inflation scenarios, including more benign tariff and energy outcomes and more persistent inflation outcomes that would call for tighter policy.

That fits the Warsh Fed’s emerging style. Officials are not giving markets a rate path. They are giving markets conditional branches. The July CPI print, therefore, carries more weight than usual because the Fed has deliberately avoided converting speeches into pre-commitments.

There was also an operational thread. Lorie Logan said voluntary central clearing could make Fed open-market operations more efficient and support stronger U.S. markets, while Roberto Perli said reserve-management purchases are not on a preset course and can be adjusted depending on money-market conditions.

The message is that the Fed’s institutional review is not abstract. It is already connected to repo usage, reserve demand, Treasury-bill purchases and how the central bank controls short-end rates.

Global Desk: RBNZ Hikes, BNM Waits, ECB Stays Uneasy

The global central-bank picture is divergence with a hawkish bias.

The Reserve Bank of New Zealand raised the OCR by 25 basis points to 2.50% on July 8, saying it was appropriate to start reducing monetary stimulus to return inflation to the 2% midpoint. The RBNZ also said further OCR increases appear likely, though their timing is highly uncertain.

Bank Negara Malaysia moved the other way only by staying still. It kept the overnight policy rate at 2.75%, with resilient domestic demand and contained inflation allowing the central bank to wait despite Middle East risks.

The ECB accounts were not comfortable. Policymakers were shown projections in June in which headline inflation stayed well above target into the first half of 2027 despite almost three embedded 25-basis-point hikes. That keeps the July 22–23 ECB meeting in play, even if lower energy prices have reduced pressure for an immediate follow-up.

The common theme is that central banks can wait only where domestic inflation and currency conditions allow it. The Fed, ECB and RBNZ are still dealing with inflation persistence; BNM has more room because inflation is contained.

Markets: CPI and Warsh Testimony Now Share the Same Day

The next Fed test is unusually concentrated.

June CPI is scheduled for July 14 at 8:30 a.m. ET, and Warsh is scheduled to deliver his first monetary-policy testimony before the House Financial Services Committee at 10:00 a.m. ET the same day.

A firm CPI print would force Warsh to defend the Fed’s inflation stance in real time. A softer print would let him lean into data dependence and the Committee’s ability to wait. Either way, the hearing becomes the first direct test of whether Warsh can explain a less-guided Fed without sounding evasive.

Policy Themes

Rajan makes the balance sheet the policy story. The Fed’s rate path still depends on inflation data, but the institutional review means reserves, repo, bill purchases and balance-sheet size are moving back into the centre of policy strategy.

The minutes were hawkish by scenario, not by action. The FOMC voted unanimously, but the discussion validated the market’s September risk premium.

Forward guidance is being replaced by conditional communication. Williams, Warsh and the minutes are all pointing to the same framework: no mapped path, but clear intolerance of persistent inflation.

Global divergence is not a dovish turn. RBNZ hiked, BNM held, ECB remained inflation-concerned. The easing story is local, not global.

The Week Ahead

Mint Street Notes
The FCNR(B) push is moving from policy announcement to market execution, and the early signal is more complicated than the headline inflow hopes.

The Economic Times reported that FCNR(B) deposit mobilisation has slowed after an enthusiastic start, as high-net-worth overseas Indians seek double-digit dollar returns and assess tax implications. The core problem is leverage math: overseas borrowing costs that were previously near 100 basis points over benchmark rates are now closer to 150 basis points, reducing the attractiveness of leveraged deposit structures.

RBI also clarified that Indian banks, including overseas branches, can extend loans to non-residents or issue standby letters of credit against FCNR(B) deposits mobilised under the scheme, and that the RBI swap covers only principal, not interest. (Reserve Bank of India)

The operational question is whether the scheme can still generate scale if leveraged returns fall below investor expectations. The earlier pitch was powerful: banks raised FCNR(B) rates sharply, and ET had reported rates in the 5.25%–7.1% range after the RBI absorbed hedging costs. But if offshore funding costs keep rising, the scheme becomes less of a “free carry” trade and more of a straightforward high-yield dollar deposit.

The reserves data provide some cushion. India’s foreign-exchange reserves rose by $7.26 billion to $674.19 billion in the week ended July 3.

Mint Street’s position is therefore tactical: use FCNR(B), swaps and intervention credibility to manage the rupee, but avoid turning FX stress into a repo-rate signal unless CPI, oil or the dollar force the MPC’s hand.

The Signal
Rajan’s appointment makes the Fed’s balance sheet a live policy variable again. The minutes keep September alive. CPI decides whether July becomes uncomfortable.

Sources: Federal Reserve, FOMC minutes, Reserve Bank of India, Reserve Bank of New Zealand, Bank Negara Malaysia, European Central Bank, Bank of Canada, Bank of Japan, Bureau of Labor Statistics, Reuters, Economic Times, ETBFSI.