Federal Reserve Chairman Kevin Warsh is penciling in fewer rate-setting meetings next year. But Wall Street wants to know how the central bank plans to manage the economy between those meetings.
The move reflects the chairman's continued push to re-evaluate the inner workings of the Fed and to reduce certain communication tactics like forward guidance.
But on Wall Street, it raised more questions -- most notably, how the Fed will handle economic developments during the gaps between scheduled policy meetings.
"Does it imply arbitrarily refusing to adjust policy even if economic conditions warrant it? Does it imply that tactical policy decisions and broader strategy discussions cannot be held in parallel?" asked Gregory Daco, chief economist at EY-Parthenon.
It's worth noting that next year's meeting schedule is minimally different: The Fed will continue to hold eight Federal Open Market Committee meetings next year, but only seven will include policy decisions. The eighth will be devoted to discussing "broad monetary policy strategy," with no interest-rate decision or policy statement. In 2028, the number of policy meetings will fall to six, with two reserved for strategy discussions. Warsh said that the central bank would announce more details at a later date.
"Getting policy right involves assessing near-term developments at timely, regular and information-rich intervals," Warsh said after the central bank's policy meeting last week. "But it's equally important we reserve time and space, as an intellectually diverse group, for strategic deliberations, for thinking anew about big questions, looking out over longer time horizons."
The current system gives investors a regular schedule around which to anticipate policy decisions, and those announcements have become significant events for financial markets. Since 1999, the S&P 500 has gained an average of 0.23% on Fed rate decision days, with stocks rising 52.6% of the time, according to a JPMorgan analysis.
Reducing the number of scheduled decisions would eliminate some of those trading opportunities.
The shift could also lead to more unscheduled rate-setting meetings, and, in turn, more uncertainty for a market that doesn't like surprises.
Initially, the market took the announcement to mean that there would be fewer opportunities to raise rates if there are fewer overall meetings. But that isn't necessarily the case. (Officials also could simply vote on bigger rate increases, rather than the more common quarter-percentage-point hike, at scheduled meetings.)
The Fed has a history of making emergency policy decisions between scheduled meetings, typically in response to large economic shocks.
By law, the central bank is required to meet at least four times a year and there is a longstanding precedent of eight meetings, but there is no requirement that it sets interest rates only at those meetings. Under FOMC rules, "meetings are held upon the call of the Chair of the Board or at the request of any three members of the Committee."
That means Warsh, or a group of three policymakers seeking to adjust rates, could request a meeting outside the regular schedule.
While such meetings have become increasingly rare in recent decades, the question now is what happens if the Fed begins making more decisions outside its regular schedule. The short answer: Markets might not like it.
Over the past 36 years, U.S. policymakers have made six emergency rate cuts. Those moves generally came in response to large disruptions, including the Sept. 11 attacks, the Covid-19 pandemic, and economic downturns.
There is also precedent for an unscheduled rate increase. In April 1994, the Fed raised its benchmark interest rate by a quarter percentage point, to 3.75%, in an effort to contain mounting inflation pressures. The move was part of an aggressive tightening campaign that doubled the federal-funds rate from 3% to 6% over 12 months.
The campaign helped trigger what became known as the Great Bond Massacre of 1994, as Treasury prices fell and fixed-income markets flailed.
Emergency rate cuts have hardly been reassuring for investors, either. An analysis by Schroders found that U.S. equities were, on average, already in a drawdown during the month preceding emergency Fed meetings and remained largely range-bound in the month that followed.
Emergency policy changes have historically occurred during periods of extraordinary economic stress, making it difficult to separate the market's reaction to the Fed from its reaction to the conditions that prompted the decision.
Not to mention an increase in surprise Fed meetings would undo the bank's more predictable schedule that has been decades in the making.
The Fed has held eight regularly scheduled meetings a year, roughly six weeks apart, since 1981. Before then, policymakers met much more frequently, holding as many as 18 meetings annually in the 1960s and 14 in the 1970s.
The Fed has also become more transparent about its decisions. Before 1994, monetary policy changes weren't immediately announced, leaving investors to infer the central bank's actions from the size and type of open-market operations in the days after each meeting. Between September 1994 and May 1999, it released statements only when policy changed, before shifting to a statement every meeting.
If unscheduled policy changes become more common, investors could, of course, eventually adjust to a less predictable Fed calendar, just as they did before the 1990s. But after decades of increasingly regular and transparent monetary policy announcements, the transition could be a difficult one for markets.
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