Key takeaways from Warsh's confusing message
Kevin Warsh's second press conference as Federal Reserve Chair left economists and investors scratching their heads. They appeared skeptical that the new central bank chief is as committed to eradicating inflation as he claims. Having already stated he would not reveal his views on when or if the Fed might adjust interest rates, Warsh went a step further on Wednesday by refusing to explain how policymakers might respond to different economic scenarios. He praised the rise in bond yields since the last Fed meeting, suggesting it helped the central bank and might reduce the need for rate hikes to curb inflation. In response, investors sold off 30-year U.S. Treasuries and lowered their expectations for rate increases in the coming months.
Here are some of Warsh's key statements that sparked market volatility:
Greater reliance on market dynamics
"If the committee hasn't changed its policy rate, what's happening? In the inter-meeting period, markets are focusing on real data and real economic developments. Prices are reacting in real-time to incoming information, and reduced forward guidance may also be a factor. Market participants are learning to play the ball, not the referee. Market prices will continue to respond in the direction and magnitude they deem appropriate. I see this as a positive shift, and we're just getting started." This was Warsh's first mention of Treasury market movements, and he returned to it repeatedly. He has consistently opposed providing "forward guidance"鈥攈ints about the Fed's potential future actions. On Wednesday, he argued this approach was working. While Warsh remained tight-lipped about his own views on the Fed's policy direction, other Fed officials continued to speak publicly. Some analysts said the Fed Chair's description of market dynamics was inaccurate, as investors are actually keenly listening to his colleagues, trying to predict the central bank's next moves and price them in.
"Warsh is willing to keep the policy rate steady because the market is shouldering the burden for the Fed," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. "But conversely, without subsequent follow-through from the FOMC, the tightening the market is effectively doing won't last long."
Interest rates are not the only solution
"This is exactly what we've been debating over the past two days鈥攚hether interest rates should be the primary treatment if inflation remains persistently high throughout the forecast period. Rates are likely part of the solution, but I wouldn't say they stand alone." Warsh has pledged to overhaul the institution, which he says is "too reliant on formal models and lagging data." On Wednesday, he seemed to point out that interest rates are just one tool in the Fed's arsenal. Combined with his comment that "rising bond yields help policymakers," Warsh appeared to suggest the Fed might not need to raise rates to bring down inflation.
The Fed does have other policy tools, including its balance sheet, and financial markets do influence the broader economy. But historically, the central bank has primarily relied on adjusting interest rates to control inflation or boost the labor market. Warsh's remarks left Fed watchers puzzled: Without raising rates, how exactly does he plan to achieve price stability?
No magic wand
"But I don't want to leave the wrong impression. We don't have a magic wand. This is definitely not something we can accomplish in a few days or weeks, but we will fulfill the mandate Congress has given us." Analysts interpreted Warsh's comments as a signal that he is in no rush to raise rates and may not lean heavily on interest rates as a tool to combat inflation. "With inflation still above target and the committee shifting more hawkish, his personal instincts seem dovish," said Gregory Daco, chief economist at EY-Parthenon. "He appears to be calling for patience, because the 'new' FOMC has only been in place for a few weeks."
Is PCE still the benchmark?
"That's our number, and we're still using it. But who knows? By January next year, our strategy might change. I suspect various working groups may have additions to propose." "But to achieve the goal, I'm looking at a broader set of inflation data than just PCE." The Fed has for years aimed for a 2% inflation rate, measured by the personal consumption expenditures (PCE) price index. Policymakers do consider a wide range of data to get a full picture of the economy. However, economists say any deviation from the PCE benchmark could damage the Fed's credibility and undermine public confidence in its ability to return inflation to target, making the task even harder.
Jackson Hole
"To me, it's like a blank slate right now. If possible, in the mountain air of Jackson Hole, Wyoming, I'd like to frame the big questions. There's a tendency, especially with too many meetings and press conferences, to get bogged down in short-termism鈥攍ike obsessing over whether you're adjusting 25 basis points or something." At the Kansas City Fed's annual conference in Jackson Hole, Wyoming, past Fed chairs have delivered key speeches outlining the economic outlook and policy changes heading into the fall. Fed watchers had hoped for a similar speech from Warsh at this year's August conference, especially with rate hike expectations pushed back to late 2024. But they shouldn't get their hopes up too much; Warsh has signaled he may prefer to speak more broadly, perhaps offering more insights into the major issues he wants to address at the Fed.
Press conferences will continue this year
"Between now and the end of the year, my predecessors and the Fed have committed to holding scheduled press conferences. I promise to hold them as planned this year." This would normally be unremarkable news, but under Warsh's Fed, it's an exception. The relatively new chair previously said he saw no need for regular press conferences and appointed a special task force to review all Fed external communications. The schedule for press conferences may change in the future, but Warsh made clear he has no plans to cancel any of the three remaining ones this year.
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