Kevin Warsh is new to his job as chair of the Federal Reserve, but he is already making one big change reverberating through the financial markets. He is no longer providing forward guidance about how the Fed might react to future U.S. economic developments. Are rate hikes likely to control inflation? Warsh will not say. That leaves financial analysts uncertain how to navigate the economy.
‘Learning to play the ball’
Warsh “just broke one of the Fed’s most powerful habits,” Phil Rosen said at Inc. Fed officials voted to keep interest rates steady last week, but that decision “was the least interesting news of the afternoon.” Instead, Warsh’s decision not to signal what might happen next was the “most important” thing he did. This is a departure from “years of clear and frequent forward guidance” under former chair Jerome Powell. Warsh seems to believe that keeping future plans close to the vest “will force markets to think for themselves rather than waiting to be told which way to swing.” The markets are “learning to play the ball, not the referee,” Warsh said to reporters.
That is discomfiting to market players. “No really, what is Kevin Warsh thinking?” Kai Ryssdal and Sean McHenry said at Marketplace. The chairman has signaled “commitment to getting inflation under control,” but the absence of forward guidance means the Fed’s plans for how to do that are “still a little unclear.” Markets understandably want to know “what are the contingency plans? What would it take for the Fed to raise rates?” New Century Advisors’ Claudia Sahm said to the outlet. Warsh’s new strategy potentially “obscures the Fed’s framework for understanding and reacting to economic conditions,” Maria Eloisa Capurro said at Bloomberg.
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It is a “good thing” that the “Fed is staying quiet” under Warsh, Benn Steil said at The Washington Post. The Fed’s forward guidance under Powell often relied on “faulty forecasts” that “regularly undershot actual inflation.” That “doesn’t enhance credibility” for the Federal Reserve. “The most useful forecast is no forecast at all.”
A ‘less transparent Fed’
“Silence isn’t golden for a world looking to Kevin Warsh’s Fed,” Nicholas Spiro said at South China Morning Post. Warsh and his allies are correct that the Fed’s “forward guidance often proved counterproductive” under Powell. But a “less transparent Fed” creates “uncertainty in an already messy and unpredictable world.” Warsh has a “credibility problem” in that it is not clear to investors “how willing he is to push for interest rate increases” in the face of inflation. His silence “could be a pretext for ducking hard questions” about Fed policies.
Stocks dropped and bond yields rose following last week’s Fed meeting, said The Wall Street Journal, a sign that Warsh’s silent treatment has not reassured markets he will aggressively confront inflation with higher interest rates. Investors “want to feel comfortable that the Fed knows what it is doing,” Loretta Mester, the former president of the Cleveland Fed, said to the outlet. “Not saying anything” may not be sustainable.
