Fed Chair Kevin Warsh Sticks With Leaner Communications Strategy, Says Markets Understand His Policy Framework
Federal Reserve Chair Kevin Warsh has decided to continue pursuing a streamlined approach to policy communications, despite a sharp selloff in the U.S. Treasury market after last month’s policy meeting, when he was criticized for not fully explaining the details of his interest-rate strategy. Since taking over as Fed chair in May, Warsh has advocated a major reduction in the central bank’s forward guidance to markets. After last month’s Fed meeting, however, the yield on 30-year U.S. Treasuries surged last week to its highest level since 2007. Many investors said Warsh’s limited communication weakened his credibility in containing inflation as energy prices rise. People close to Warsh said he acknowledges that he made mistakes during his first 10 weeks leading the world’s most important central bank. Those mistakes included failing to reinforce his core message about price stability and creating confusion over whether the Fed’s long-term reform plans would affect near-term policy decisions. But the people familiar with the matter emphasized that the mistakes were not enough to make Warsh change course on his effort to reform the Fed’s communications system. The Fed has failed to achieve its 2% inflation target for more than five consecutive years. Warsh believes leaner communication will reduce the market’s focus on guessing at officials’ policy signals and encourage greater attention to economic data itself. Warsh has maintained publicly that the “triggers” with actual authority over investment decisions in the bond market understand his policy thinking, even as criticism of his approach has intensified. With inflation pressures having remained unusually strong for five years, some observers say Warsh’s credibility will inevitably be tested, and that market doubts may not fully disappear until inflation returns to 2%. The Fed’s preferred inflation gauge was 3.7% in June. People familiar with the matter said that if inflation data released over the next several weeks remains elevated and market expectations for rate increases rise, Warsh is prepared to raise interest rates at the September meeting. Data from CME Group shows that the federal funds futures market currently puts the probability of a 25-basis-point September rate increase at about 55%. Although Warsh has raised the possibility of shrinking the central bank’s $6.7 trillion balance sheet to tighten monetary policy, people familiar with the matter said interest rates remain the main policy tool and will be used at subsequent meetings if necessary. Since leaving the Fed in 2011, Warsh has repeatedly said that the “forward guidance” provided by his predecessors left them constrained by their own statements and led them to overpromise policy actions. Any major reform of the monetary-policy process will be delayed at least until next year, when a working group Warsh announced at his first news conference in June is expected to submit a report to the Federal Open Market Committee. Later this month, Warsh is expected to speak at the Jackson Hole symposium hosted by the Federal Reserve Bank of Kansas City. He is expected to explain the theoretical framework behind his “silent revolution,” including clarifying shortcomings in his own communications. Eric Wallerstein, chief macro strategist at Clocktower Group and a former adviser to Fed Governor Stephen Miran, said Warsh’s speech will show that he is determined to leave his mark. He said central-bank leaders are going through a difficult period, with many mistakes having been made across the board, including at the Fed, and that Warsh wants to summarize those problems and correct course. Torsten Slok, chief economist at Apollo Global Management, said negative assessments of Warsh are unfair. A consensus had already formed that forward guidance was not a good policy and had limited central-bank flexibility, Slok said. At the same time, he said Warsh still has more work to do in explaining the Fed’s plan for controlling inflation. Warsh’s predecessors Jay Powell, Janet Yellen and Ben Bernanke all provided extensive guidance on the economic outlook and the direction of monetary policy. Since completing his five-year term as a Fed governor in 2011, Warsh has repeatedly said that this style of communication left the central bank trapped by its own words.
Since taking over as Fed chair in May, Warsh has advocated a major reduction in the central bank’s forward guidance to markets. After last month’s Fed meeting, however, the yield on 30-year U.S. Treasuries surged last week to its highest level since 2007. Many investors said Warsh’s limited communication weakened his credibility in containing inflation as energy prices rise.
People close to Warsh said he acknowledges that he made mistakes during his first 10 weeks leading the world’s most important central bank. Those mistakes included failing to reinforce his core message about price stability and creating confusion over whether the Fed’s long-term reform plans would affect near-term policy decisions.
But the people familiar with the matter emphasized that the mistakes were not enough to make Warsh change course on his effort to reform the Fed’s communications system. The Fed has failed to achieve its 2% inflation target for more than five consecutive years. Warsh believes leaner communication will reduce the market’s focus on guessing at officials’ policy signals and encourage greater attention to economic data itself.
Warsh has maintained publicly that the “triggers” with actual authority over investment decisions in the bond market understand his policy thinking, even as criticism of his approach has intensified. With inflation pressures having remained unusually strong for five years, some observers say Warsh’s credibility will inevitably be tested, and that market doubts may not fully disappear until inflation returns to 2%.
The Fed’s preferred inflation gauge was 3.7% in June. People familiar with the matter said that if inflation data released over the next several weeks remains elevated and market expectations for rate increases rise, Warsh is prepared to raise interest rates at the September meeting. Data from CME Group shows that the federal funds futures market currently puts the probability of a 25-basis-point September rate increase at about 55%.
Although Warsh has raised the possibility of shrinking the central bank’s $6.7 trillion balance sheet to tighten monetary policy, people familiar with the matter said interest rates remain the main policy tool and will be used at subsequent meetings if necessary.
Since leaving the Fed in 2011, Warsh has repeatedly said that the “forward guidance” provided by his predecessors left them constrained by their own statements and led them to overpromise policy actions. Any major reform of the monetary-policy process will be delayed at least until next year, when a working group Warsh announced at his first news conference in June is expected to submit a report to the Federal Open Market Committee.
Later this month, Warsh is expected to speak at the Jackson Hole symposium hosted by the Federal Reserve Bank of Kansas City. He is expected to explain the theoretical framework behind his “silent revolution,” including clarifying shortcomings in his own communications.
Eric Wallerstein, chief macro strategist at Clocktower Group and a former adviser to Fed Governor Stephen Miran, said Warsh’s speech will show that he is determined to leave his mark. He said central-bank leaders are going through a difficult period, with many mistakes having been made across the board, including at the Fed, and that Warsh wants to summarize those problems and correct course.
Torsten Slok, chief economist at Apollo Global Management, said negative assessments of Warsh are unfair. A consensus had already formed that forward guidance was not a good policy and had limited central-bank flexibility, Slok said. At the same time, he said Warsh still has more work to do in explaining the Fed’s plan for controlling inflation.
Warsh’s predecessors Jay Powell, Janet Yellen and Ben Bernanke all provided extensive guidance on the economic outlook and the direction of monetary policy. Since completing his five-year term as a Fed governor in 2011, Warsh has repeatedly said that this style of communication left the central bank trapped by its own words.