Kevin Warsh, the Federal Reserve Chair who recently presided over his first monetary policy meeting two weeks ago, is scheduled to appear at the European Central Bank's "Global Central Bank Forum" in Portugal on Wednesday for a panel discussion.
At 21:30 Beijing time on Wednesday, Warsh, along with ECB President Christine Lagarde, Bank of England Governor Andrew Bailey, and Bank of Canada Governor Tiff Macklem, will deliver remarks during the forum's "Policy Panel" event.
This will be Warsh's first public appearance following last month's Federal Open Market Committee (FOMC) meeting, with markets keen to glean insights into his policy thinking.
However, those hoping for clear forward guidance may be disappointed. Warsh has previously expressed reservations about such communication tools, suggesting they offer limited help for policy execution and indicating a preference for less communication. A global audience will be watching to see how far Warsh's low-information strategy will go.
In a farewell interview with Reuters last Friday, Pierre-Olivier Gourinchas, the outgoing Chief Economist of the International Monetary Fund (IMF), stated that strong forward guidance has an "extremely poor reputation" because it locks central banks into a future course of action regardless of how economic conditions evolve. He noted that this tied the Fed's hands, preventing a faster response to the post-pandemic inflation surge.
"So, I think it's entirely appropriate to move away from these strong forms of forward guidance. But to say there is no forward guidance at all, I think that's actually never the case. Whether you say it explicitly or not, the market will form its own view," he said.
Rather than outlining a specific interest rate path, Warsh is more likely to reveal his analytical framework through a macroeconomic lens. He may offer insights into how he views inflation and the economy.
At his first press conference, Warsh announced the formation of five specialized working groups covering communication methods, economic data sources, the inflation framework, the balance sheet, and productivity measurement in the context of technological change. This suggests his remarks may focus more on explaining "how to view the problems" rather than "what the next steps will be."
Krishna Guha, Head of Central Bank Strategy and Economics at Evercore ISI, noted that markets will focus on observing how Warsh decomposes the drivers of inflation, including factors like falling oil prices, shifting inflation expectations, commodity price movements, a stronger U.S. dollar, and cost spillover effects from artificial intelligence.
He pointed out that it remains to be seen to what extent any improvement in inflation expectations relies on a strengthening of the central bank's credibility, adding that "this point still needs to be verified."
Investors are likely to hear one thing from Warsh: the Fed's commitment to price stability. While the specific policy path may remain unclear, Warsh is expected to reiterate this core commitment.
Current U.S. inflation remains elevated: the core Personal Consumption Expenditures (PCE) price index, excluding food and energy, rose to 3.4% in May, its highest level since October 2023.
Ed Yardeni, President of Yardeni Research, believes Warsh is attempting to talk down U.S. Treasury yields with tough rhetoric on inflation, thereby lowering borrowing costs—as Treasury yields influence mortgage and auto loan rates.
"We believe a new 'Treasury-Fed Accord' is in the making, aimed at lowering the 10-year U.S. Treasury yield," Yardeni wrote in a report.
In this view, Treasury Secretary Scott Bessent and Warsh are seen as key figures working in tandem to advance this policy direction. Yardeni suggests the two have convinced the Trump administration that by reinforcing an anti-inflation stance and even raising rates if necessary, long-term rates can be lowered, thereby supporting the economy.
In a speech at the Economic Club of New York on June 23, Bessent also emphasized the importance of the bond market, stating that "bond markets have overthrown more governments than howitzers," and indicated that Warsh would work to balance inflation control with maintaining growth. He also noted that President Trump has "full confidence" in Warsh.
Warsh's hawkish tone during the Fed meeting's press conference has already had a direct market impact: the 2-year Treasury yield has risen, reflecting increased investor expectations for rate hikes, while the 10-year yield has retreated from around 4.5% to approximately 4.3%. Market pricing currently implies about an 80% probability of a rate hike in September.
Although Warsh himself has not elaborated on the rate path beyond official statements, clear divisions have emerged within the FOMC. This year, nine committee members anticipate at least one rate hike, with six of those expecting at least two hikes, while eight others favor holding rates steady.
Guha pointed out that if Warsh believes rate hikes are necessary to build policy credibility, implementing one action in July and another in September could help complete the adjustment before the midterm elections. However, he added that the more likely current scenario is that Warsh is still assessing whether hikes are needed to reinforce credibility, meaning immediate action at the July meeting may not be forthcoming.
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