Alan Greenspan once said “since I’ve become a central banker, I have learned to mumble with great incoherence.” Greenspan, who passed away recently at the age of 100, led the Federal Reserve (the central bank of the United States) from 1987 to 2006 and became one of the most important economic figures of the 20th century. As we look back on his legacy just days after Kevin Warsh chaired his first Fed meeting, comparing these two leaders reveals some important shifts in how the Fed may work in the years ahead.
Understanding the Fed’s past can help investors make sense of where monetary policy (meaning the decisions the Fed makes about interest rates and the money supply) may be headed. Greenspan leaves behind a complicated record. On one side, he helped bring stability after a period of very high inflation in the 1970s and early 1980s. On the other, his time at the Fed also overlapped with the housing bubble and the global financial crisis. Throughout all of this, he helped shape the role the Fed plays to this day.
It may not be a coincidence that Warsh’s vision for the Fed shares some features with the Greenspan era. Both favor less public signaling about future decisions, a smaller balance sheet (the total value of assets the Fed holds), and a tighter focus on the Fed’s core responsibilities. At the same time, it is worth keeping in mind that the economy has grown under many different Fed leaders, largely because the Fed does not control many of the key forces that drive growth, such as new technology or changes in the population. So how should long-term investors think about the latest changes at the Fed?
The economy has expanded under many different Fed chairs
It is important to know that the Fed has not always worked the way it does today. For much of Greenspan’s time as chair, the Fed did not even announce its interest rate decisions to the public. Instead, markets had to figure out what the Fed had done by watching short-term interest rates. When the Fed did release statements, the language was intentionally hard to understand, something economists call “Fedspeak.”
It was not until 1994 that Greenspan began releasing a brief public statement whenever rates changed, though even then it offered very little explanation. Over time, the Fed began including more language explaining why it made the decisions it did based on economic conditions.
This trend continued over the following three decades. Tools like press conferences, “dot plots” (charts showing where officials expect rates to go), and “forward guidance” (hints about future policy moves) were developed under chairs Ben Bernanke, Janet Yellen, and Jerome Powell. Many of these changes were driven by major economic crises, including in 2008 and 2020, when the Fed believed that clear communication could help restore public confidence.
Regardless of the many debates about how the Fed should operate, U.S. economic output has grown across the tenures of many different Fed chairs, who were nominated by presidents from both political parties. Each of these leaders faced their own unique economic challenges and helped set the stage for those who came after them. The economy kept expanding over long stretches of time despite very different approaches to policy and different relationships with the White House.
Warsh’s first meeting signals a new approach to communication
Although the goal of these communication changes was to make the Fed more transparent, Warsh and others have argued that this openness has gone too far. At his first FOMC (Federal Open Market Committee, the group that sets interest rates) meeting in June, Warsh made several notable changes. The official statement was much shorter, cutting out language that had become routine over the years. Forward guidance, which refers to the practice of hinting at what the Fed might do at future meetings, was removed entirely. Warsh also chose not to submit his own forecasts to the Fed’s Summary of Economic Projections, indicating he does not see these numbers as useful.
Perhaps most notably, Warsh announced five working groups to study different parts of how the Fed operates and makes decisions. These groups will focus on communications, the data the Fed uses to measure the economy, its approach to managing inflation, the effects of AI and technology, and the balance sheet. These priorities are consistent with Warsh’s previously published views on how the Fed should function.
For long-term investors, one of the most interesting areas is productivity growth driven by AI. Productivity measures how much output workers and businesses can produce for a given amount of effort or resources. Productivity growth has been uneven across different decades, with a clear jump during the technology-driven expansion of the 1990s. Measuring productivity accurately in real time is difficult, and even small improvements can make a big difference to overall economic growth because these gains build on each other over time.
This matters because, in simple terms, when productivity rises, businesses can produce more without needing to hire as many workers. While much of the conversation around AI focuses on jobs and disruption, higher productivity is ultimately what allows wages and living standards to improve over the long run. Technology can also help keep inflation (the rate at which prices rise) in check if it genuinely reduces the cost of making goods and services.
All of this has real implications for monetary policy. In the near term, the Fed has been dealing with a challenging period of inflation, and the ongoing war in Iran continues to create uncertainty around energy prices. The latest Fed rate projections show that officials are divided, with roughly half expecting rates to stay at current levels by year-end and the other half expecting them to move higher.
The size of the Fed’s balance sheet remains a key issue
Interest rates are not the only tool the Fed has at its disposal. The Fed’s balance sheet, which is the total value of financial assets it holds, was less than $1 trillion before the 2008 financial crisis. It then grew dramatically through several rounds of asset purchases. During times of crisis, the Fed bought bonds directly in the open market, mainly U.S. government bonds (called Treasurys) and mortgage-backed securities (bundles of home loans). This pumped money into the financial system and helped push interest rates lower, which is part of why the Fed is sometimes called the “lender of last resort.” Today, the balance sheet stands at $6.7 trillion, down from its peak of nearly $9 trillion in 2022.
Warsh was a Fed governor during the financial crisis and supported these balance sheet expansions as emergency measures at the time. However, he has also argued that the Fed should have been more deliberate about unwinding these holdings once conditions improved. Reducing the balance sheet, often called “quantitative tightening,” means allowing bonds to mature without buying new ones to replace them, or in some cases, actively selling assets.
How the Fed will adjust its communications, its decision-making process, and its balance sheet is not yet fully clear, but it is possible that these changes could lead to tighter financial conditions. For long-term investors, this could affect bond prices, mortgage rates, the cost of borrowing for businesses, and more. A Fed that provides less guidance may produce less confusing Fedspeak, but it could also create more uncertainty about how the Fed will respond to new economic developments.
The broader lesson here is that the Fed’s approach to monetary policy is always changing. It evolves in response to economic conditions, new research, political considerations, and the individual judgment of each chair. For long-term investors, it is important to keep in mind that the Fed is only one piece of the larger picture. The underlying trends driving the economy, many of which look positive today, are ultimately what allow investment portfolios to support long-term financial goals.
The bottom line: The Fed has evolved under different leaders over the past several decades. While this context is important to understand, maintaining focus on portfolio construction and financial plans is still the best way for investors to achieve their long-term goals.
References
1. Federal Reserve press release: https://www.federalreserve.gov/newsevents/pressreleases/other20260622a.htm
2. FOMC statement (February 1994): https://www.federalreserve.gov/fomc/19940204default.htm
3. FOMC monetary policy statement (June 2026): https://www.federalreserve.gov/newsevents/pressreleases/monetary20260617a.htm
4. Federal Reserve balance sheet recent trends: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
5. FOMC press conference transcript (June 2026): https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20260617.pdf