Against the backdrop of the majestic Grand Teton mountains, Kevin Warsh will deliver a speech next week that is likely to have a profound impact on his term as chairman of the Federal Reserve and the credibility of the central bank.
Warsh, who succeeded Jerome Powell in May, has said that he wants to use the speech to frame the "big questions" facing the Fed-concerns around inflation targets, productivity, demographic changes, and global economic shocks.
But while the Jackson Hole Economic Policy Symposium may be a natural fit to explore big-picture themes-Ben Bernanke used his inaugural speech to discuss globalization, while Janet Yellen examined maximum employment-Fed watchers say Warsh must make room in his remarks to discuss how the central bank will respond to current economic conditions, specifically elevated inflation.
"Warsh is going to have to address the elephant in the room, which is inflation," says Patrick Harker, former Philadelphia Fed president currently serving as a professor at the Wharton School of the University of Pennsylvania. "He's got to actually say more than 'we're in the fight.' That's not going to fly. If that's going to be his approach, it's going to really be a disappointment to the markets."
Warsh has taken the reins of the Fed at a time when a series of successive shocks have pushed inflation above the Fed's 2% target for five years. At every opportunity, Warsh has vowed to deliver price stability, as Americans are increasingly concerned about inflation.
But he has been scant on the details of how the Fed will accomplish this, or even when inflation will return to 2% on a regular basis. Instead, as part of his leadership strategy, Warsh has declined to provide forecasts about the likely policy path, known as forward guidance. He has also avoided explaining which economic conditions or scenarios might prompt a shift in interest rates from the current range of 3.50% to 3.75%.
Warsh believes that eliminating forward guidance will help the Fed avoid policy mistakes because officials won't feel bound to earlier forecasts. Warsh has also said he wants markets to make independent assessments of the economic data, rather than just echo what Fed officials say.
That lack of guidance came to a head during the July news conference when reporters unsuccessfully grilled Warsh for details, leading to fears that the new Fed chair only talked tough. Markets tumbled in the aftermath. Since then, the odds of a September interest-rate increase have fallen significantly as the latest July economic data delivered cooler inflation, a decline in job growth, and a slump in consumer spending.
"It will be difficult for Warsh to get away with a speech that is completely detached from the current policy debate," says Marco Casiraghi, a senior economist at Evercore ISI. "Just repeating the message that he used in the June and July news conferences-that the Fed will restore price stability, that very high level of commitment-may not be enough."
Warsh must address how the Fed will bring down inflation, says Jim Bullard, former St. Louis Fed president and the current dean of the Mitch Daniels School of Business at Purdue University.
"The Fed's credibility is at risk-the markets are starting to think that the committee doesn't really care about getting to 2%," Bullard says. And while Warsh has stated that the Fed will get inflation back to 2%, Bullard points out that he hasn't said that he's willing to raise interest rates to do that.
Bullard says that Warsh's openness to moving the official inflation benchmark away from the annual growth rate of the personal consumption expenditures price index could also risk the central bank's integrity, especially if that change occurs before the Fed achieves 2% inflation.
Over roughly the past two decades, central banks around the world have dramatically increased their communications and transparency-adding more news conferences, publishing the minutes of policy meetings, and regularly updating their outlook and policy guidance.
Much of this increased communication was done in the wake of the 2008-09 financial crisis, when the Fed and other central banks slashed the benchmark policy rate to zero. With no room for additional rate cuts, central banks instead vowed to hold short-term rates low to push down longer-term borrowing costs.
But with the fed-funds rate now far from zero, Warsh has pursued a "quieter Fed," eliminating forward guidance and indicating he would like fewer speeches, shorter policy statements, and, perhaps, even fewer Federal Open Market Committee policy-setting meetings.
The expansion in central bank communications has had clear benefits, notes Goldman Sachs economist Joseph Briggs. He calculates that increased communication lowered year-ahead rates volatility by about 10% and improved the transmission of monetary policy. Briggs found no evidence that central banks with increased communications were slower to adjust policy in the wake of economic shifts.
Each new chair brings new processes and ideas, but Warsh's changes seem particularly striking because the past few handoffs have largely preserved the continuity at the Fed. "The Warsh appointment feels like easily the biggest shift that we've had since Paul Volcker, where a chairman was brought in specifically to change things," says Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets.
Volcker changed FOMC procedures in such a way that let the market set interest rates, which dramatically boosted interest rates, says Gary Richardson, an economics professor at the University of California, Irvine. He believes that Warsh's reduction in forward guidance, as well as a smaller balance sheet, also will let the market set longer-term interest rates and probably spur a rise in those rates.
"It's a different way of doing things," Richardson says.
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