For Warsh as Fed chair, silence may be the point

Markets are entering the first Fed meeting under new Chairman Kevin Warsh with virtually no idea what he thinks about the recent uptick in job growth, the acceleration in inflation or the direction of interest rates.

And that may be by design.

Warsh strongly criticized the Fed’s communications, saying they led to policy mistakes and placed the Fed more at the center of market decisions and the economy than it should have been. His “regime change” plans include rethinking the Fed’s forecasts and conversations about monetary policy plans. This seems to include both quantity and frequency.

“If you ask me my real personal opinion right now, Fed chairmen and other central bankers around the FOMC are talking pretty often,” Warsh said at his confirmation hearing in April, referring to the Federal Open Market Committee. “I can say this, I think the search for the truth is more important than repetition. If a press conference is being held, important news is wanted to be given.”

The short-term question is where Warsh stands on eliminating the signal in the Fed’s policy statement to markets that the central bank hopes to continue lowering interest rates. The “tendency to ease” is part of the FOMC statement signaling further interest rate cuts. At the last meeting, three FOMC members dissented and signaled they wanted the Fed to stop pursuing cuts.

And the so-called Fed speech, where every word is parsed by the markets, could become even more nuanced.

JP Morgan Chief Economist Michael Feroli doesn’t think Warsh will say he’s “open” to rate hikes, “but I can see him saying he can’t rule it out.”

Removing easing bias would align with Warsh’s long-term desires for how much the Fed will taper its next move.

In 2014, after a previous term as Fed Governor, Warsh led an internal review of the Bank of England’s communications strategy, advocating the need for more transparency but less communication overall. He described the BOE’s monthly meeting schedule as “suboptimal” and suggested reducing the number of annual meetings from 12 to eight.

“Except during periods of crisis, the economic landscape tends to change quite slowly. It is rare indeed for the economy to change so rapidly that adjustments to monetary policy are needed in four-week intervals.” Warsh wrote in the report:.

Just last year, Warsh reiterated these ideas in a speech at the Hoover Institution, saying: “Fed leaders would be well served to jump at opportunities to share their latest thinking…The swivel chair problem, discursively amplified and diminished by the release of the latest data, is a pervasive and counterproductive problem.”

The Fed has already announced that Warsh will hold a news conference after next week’s meeting, suggesting at least initially sticking with Fed Chair Jerome Powell’s past practices. But in his testimony in the Senate, he did not commit to doing these things after each meeting. That led to speculation that Powell might return to meetings at the same frequency, four times a year, before increasing them at each meeting.

But there are potential costs, including greater market volatility and a loss of power for the Fed chairman.

“It’s really not a good idea for the Fed to surprise the markets.” [or] “We’re going to go backwards in terms of communication,” former Cleveland Fed President Loretta Mester said. “But that doesn’t mean it can’t be improved.”

Former Fed Vice Chairman Richard Clarida warned shortly after Warsh was nominated in January that “the transition to a new communications regime could be bumpy.”

Rather than the Fed chairman rallying FOMC members toward a decision before the meeting, Warsh would be best served deciding the Fed’s policy through robust discussion around the table. He believes this will lead to better decisions and better meetings.

Warsh’s problem is that he has little ability to control his colleagues’ public speeches and interviews. The 12 regional Fed bank presidents have the right to speak independently and frequently exercise that right before and after meetings.

“You can’t go into a world where no one talks,” Clarida told CNBC. “People will talk. It makes sense to stick to the bully pulpit.”

This is also an argument for continuing to hold press conferences at every meeting.

“The press conference is the president’s best friend,” Feroli said. “This allows the chair to be the first person out the door to establish the narrative of what happened at the meeting and what the committee is thinking at the moment.”

According to Warsh, the upside of providing less guidance on where the Fed will go is that it will be less influenced by the Fed’s speech and get a better signal from markets about where the Fed should go.

In 2004, former Fed Chairman Ben Bernanke, then governor, coined the phrase “the hall of mirrors problem, in which the policymaker simultaneously sends signals to the market about future policy and attempts to gain insight from the market.”

Warsh believes Fed communications contaminate that signal by leading markets to expect Fed officials to feel obligated to deliver even if it’s the wrong policy.

He also makes a similar criticism. “Dot plot where officials anonymously write their Fed funds rate forecasts. He believes this is preventing the Fed from moving quickly to contain inflation resulting from the covid pandemic.

“The Fed is telling the world what its points are going to be, what its forecasts are going to be,” Warsh said in April Senate testimony. “The Fed is human, so they’re holding on to these forecasts longer than they should. I think if the Fed waits until they’re in a meeting before making a decision, this increased deliberation could prevent the central bank from making further mistakes.”

Old St. According to St. Louis Fed President James Bullard, several ideas to solve the “dot chart” problem have been discussed within the Fed. These include releasing forecasts some time after the meeting to keep the market’s attention on the statements. Another idea is to publish the personnel forecast, which staff have resisted out of concern that it could become the subject of political scrutiny.

The forecast document is a document agreed upon by the entire FOMC; This means Warsh cannot make changes unilaterally. This underscores the general expectation that the new Fed chairman may plan fundamental changes to the Fed communications strategy, but these are likely to happen only gradually.