Warsh Dismisses Monetary Policy Guidance
Federal Reserve Chairman Kevin Warsh had some sharp recommendations for Wall Street: he believes they should stop looking for hints from the Fed about future interest rates.
During a conference for central banks in Portugal, Warsh was particularly firm on this point. He refused to offer what many refer to as “forward guidance,” and even seemed to mock those who sought such insights.
“I mentioned at the press conference that I wasn’t going to provide any forward guidance since we’d be meeting in six weeks,” Warsh explained. “We have the latest information.”
Has his stance on forward guidance changed? No, he’s still holding the line. The next meeting is also just four weeks away.
When panel moderator Sarah Eisen from CNBC inquired if rate hikes would be discussed in the upcoming Federal Open Market Committee meeting, Warsh joked, “Sarah is trying to get me to break this rule about not giving guidance. She’s not going to succeed.”
For over a decade, Warsh has contended that the Fed has given too many details about its interest rate path. He made it clear in a previous speech that, in his view, the era of forward guidance had passed. “It’s a concept that was heavily promoted during the financial crisis but doesn’t have much relevance in normal times. While it might seem tempting to sway the markets with repeated statements from the Fed, it doesn’t actually help in making our decisions or fulfilling our mission. Central banks should find comfort in operating without expecting applause or an eager audience,” he remarked.
Emerging Central Bank Consensus
Though some in the U.S. financial media and certain Wall Street analysts seem frustrated by Warsh’s position, he isn’t isolated in this belief. European Central Bank President Christine Lagarde also noted during the panel that the ECB has abandoned forward guidance. She shared that one of her central banking regrets is feeling obligated to adhere to past guidance from banks.
Lagarde noted that the ECB has shifted to providing “framework guidance” rather than forward guidance. This means informing the market about its monetary policy decision-making, which includes the data considered and the thought processes involved.
“We found common ground,” Warsh responded. “I admired her from our first meeting twenty years ago when she was finance minister. I was thrilled with her recent comments…President Lagarde’s thoughts on forward guidance resonated with me; I couldn’t have articulated it better myself.”
The tradition of offering forward guidance emerged as a way to further loosen financial conditions when rates were already at the “zero bound.” The idea was that the Fed could keep long-term interest rates low for an extended period, which would aid the economy, while also instilling a cautionary message about potential inflation.
Yet, as time passed and rates moved above zero, the Fed clung to its routine of forward guidance. Its reasoning shifted to needing to mitigate fluctuations in financial markets and avoiding excessive uncertainty that could negatively impact the economy. At times, the Fed’s own predictions were positioned as essential for managing inflation expectations. This change suggests that forward guidance may have become a ritual that lost its original justification.
Such a significant shift will naturally face pushback. As the saying goes, old habits die hard. At the end of the panel, Eisen pressed Warsh about whether the Fed provides ample information to help the market understand the data influencing its interest rate decisions. Warsh pushed back, stating,
“As we’ve been saying recently, we need greater insight into your response mechanism. If you examine the triggers, volatility among those making decisions in the bond market isn’t increasing; it’s decreasing. Yields aren’t climbing; they’re falling. Inflation expectations are also on the decline. Clearly, people don’t seem to grasp it. But I think they actually do,” Warsh remarked.
It’s often said that the Fed’s role is to take away the punch bowl just as the party begins. Warsh seems to be tackling another role: lowering the ‘mood music’ surrounding monetary policy.
