Kevin Warsh's Kabuki dance

Kevin Warsh’s reforms at the Federal Reserve may prove more form than substance.

He can tap down forward guidance — Fed policymakers’ ruminations about the future direction of interest rates — by eliminating the forecasts they publish quarterly for GDP, inflation, unemployment and interest rates.

But then investors will hang even more on every word he and other Fed officials utter.

If he really wants to stoke uncertainty and nervousness in financial markets, he can convince Fed governors and district bank presidents to speak less in public — or be terribly vague when they do. Or he can suspend or abridge the statement the Fed issues and press conferences he holds after policymaking meetings.

But he’s a chair, not a CEO, and he can expect a revolt if he tries to strong-arm the other policymakers.

The Fed sets monetary policy through the size of its balance sheet — mostly, its holdings of Treasury and mortgage-backed securities — and by setting the interest rates member banks receive on deposits held at the Fed and pay on short-term credit from the Fed.

The balance sheet swelled when the Fed greatly loosened credit in the wake of the 2008 Global Financial Crisis and helped finance COVID-19 assistance to households, small businesses and the states by monetizing new government debt.

Those holdings increased from $980 billion in 2008 to nearly $9 trillion in 2022 and now stand at $6.7 trillion.

Mr. Warsh may want to further run down those holdings. But selling bonds into private markets would raise interest rates on federal securities, most notably the benchmark 10-year Treasury rate, rates on state, municipal and corporate bonds and those charged by lenders on new home mortgages, auto loans and commercial credit.

With federal budget deficits in the range of 6% of GDP, it’s difficult to see how the Fed could significantly add to the bonds circulating in private markets without boosting the cost of borrowing for virtually everyone.

As investors view bonds as substitutes for stocks, generally higher interest rates would depress or at least slow appreciation in stock prices.

If Congress won’t curb entitlement spending, it can’t lower the federal deficit.

The crisis in the Persian Gulf dramatically illustrates the U.S. military is under-resourced. It lacks adequate inventories and capacity to replenish ammunition and needs new weapons to compete in drone warfare. The navy is overstretched, with fewer than 300 active ships.

The Social Security pension trust fund will be depleted by 2033. Congress will have to raise taxes, increase federal borrowing or effectively default by paying only 77% of promised benefits.

I’m betting the federal government borrows more and partially defaults by trimming benefits to wealthier retirees. The latter could scare international investors, sink stock prices and tank the economy.

Equity losses would reduce the pool of capital available to high tech startups and spending on Artificial Intelligence that now props up private investment spending.

Income and wealth are increasingly concentrated among the top 20% of households, which accounts for at least half and a growing share of consumer spending, and among seniors, owing to an aging population, rising home values and increasing reliance on tax-advantaged retirement accounts.

Both groups depend significantly on capital gains for income.

Consequently, the Fed should seriously weigh the impact of running down its balance sheet on stock prices, because that could be a brake on consumer spending.

Like getting tough on trade with China, it’s easier to talk about reducing the Fed balance sheet when you’re running for office than doing it when you get your hands on the reins.

And running is exactly what Mr. Warsh has been doing.

Last summer, he switched his long-standing criticisms of easy money policies to advocacy for lower interest rates and some vague notion of a new framework for Fed policies toward inflation.

The argument offered is that artificial intelligence will so dramatically lift productivity as to permit the Fed to lower interest rates without boosting inflation.

That doesn’t pass the sunshine test.

AI is already stoking productivity growth — how else could the economy expand 2.1% in 2025, even as employment growth slowed dramatically.

Inflation remains stuck at around 3%.

It would take Houdini to substantially run down the Fed balance sheet without significantly raising interest rates and torpedoing growth and sending the jobs market into a tailspin.

Mr. Warsh will jealously guard Fed independence on monetary policy but pretend to cede more to the president on other matters like bank regulation and transparency in operations.

That’s a Kabuki dance.

The president has installed Michelle Bowman as vice chair for bank supervisions and regulation. She’s been dutifully implementing his reform agenda by making compliance simpler, more transparent and less bureaucratic.

The Fed’s business operations are annually reviewed by independent external auditors, the Office of Inspector General and the Government Accountability Office.

The Fed is already quite transparent.

• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.