Federal Reserve chairs historically over-communicate what's next. Kevin Warsh wants to say less

Fed chairs wield great power and they take great care to signal what they intend to do ahead of time to avoid surprises. Not Kevin Warsh though. He wants to say less, and investors are worried.

Transcript

SCOTT SIMON, HOST:

The Federal Reserve’s Open Market Committee meets next week. It directs one of the Fed’s biggest tools – that’s the interest rate. Raise the interest rate, it can act as a brake on the economy. Lower it, and it can act as an accelerator. It is so powerful that Fed chairs traditionally manage it with care, often signaling what they intend to do before they actually change rates. But as NPR’s Rafael Nam reports, Fed Chair Kevin Warsh is doing things differently.

RAFAEL NAM, BYLINE: There’s a big debate going on with even bigger potential consequences. To understand it, it helps to back up to 2020. The pandemic was hitting, and with panic in the streets, the Fed took one of the biggest actions it could. It cut interest rates to near zero and took other steps to support the economy. Chair Jerome Powell also had a pledge – rates would stay this way for a while.

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JEROME POWELL: We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.

NAM: It was the Fed’s way to signal, we’ll do whatever it takes to help the economy. Interest rates influence all kinds of borrowing costs, and slashing them can lead financial firms to charge less for a mortgage, for example, encouraging people to buy homes. But within a year, things were changing. Inflation was starting to surge. Economists and investors were raising the alarm. Powell, though, had committed to low rates, and he wasn’t going to change that on a dime. So he started signaling that change was coming, starting in late 2021.

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POWELL: The risk of higher inflation becoming entrenched has increased. It’s certainly increased. I don’t think it’s high at this moment, but I think it’s increased.

NAM: Powell was following the same playbook that Fed chairs since Ben Bernanke in the Great Recession have used – avoid surprises. After steadily signaling what’s coming up, the Fed finally raised rates nearly half a year later. Many on Wall Street thought it was too late – among them, Kevin Warsh. Since being nominated by President Trump in February, Warsh has made clear he thinks the Fed spends too much time talking about what it’s going to do instead of just doing it. So in July, with inflation rising, Warsh tried a new approach – not hinting what might come next.

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KEVIN WARSH: We are on the job. We will deliver. We are focused like a laser on making sure we can do it. But the suggestion that we’re going to be able to do it with our magic wand is one I want to disabuse you and everyone else of.

NAM: It was seen as the equivalent of saying, don’t worry about it. We got this. Investors, though, were not impressed. After his press conference, markets tanked as investors wondered, hang on. This is a very divided fed. Do they have a clear game plan of how to tackle inflation? So Warsh recalibrated. In a major speech last month, he sought to reassure investors – judge us for what we do, not what we say.

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WARSH: A quieter Fed, a more purposeful Fed in its communications is better able to meet its objectives, and we can be held accountable for delivering on our remit – the only true test of our credibility.

NAM: Warsh is still the new kid on the block, and investors cut him some slack. This all may sound like a geeky debate, but it’s not. The Fed chair has the power to move markets around the world with a single sentence. Getting the messaging right is important.

Professor Marc Tomljanovich at Millersville University in Pennsylvania says the Fed owes it to the American public to explain its thinking.

MARC TOMLJANOVICH: You have a bunch of nonelected officials who are driving policy, and you’re going to say, hey, we’re not going to explain our decision-making process. I don’t think we’re at the point in our society today where that trust is just given.

NAM: Warsh believes he can say less and still earn that trust. His next policy meeting is just days away.

Rafael Nam, NPR News.

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