Warsh signals that he would lead a less-transparent Federal Reserve
Kevin Warsh, President Trump’s nominee for the next chair of the Federal Reserve, told Senate lawmakers that he believes members of the Fed should speak less frequently, pull back forward guidance, and stop telegraphing what the central bank will do before interest rate meetings.
And he did not commit to holding a press conference after every policy meeting, a practice put in place by current Chair Jerome Powell that is closely watched by investors.
What Warsh painted was a picture of a central bank that harkens back to the era of former Fed Chair Alan Greenspan, when there were no press conferences and no signals ahead of time of what the Fed would do, just a statement that left investors to read the Fed’s tea leaves.
“If you ask me my true personal opinion right now, Fed chairs and other central bankers around the FOMC, they speak quite frequently,” Warsh told lawmakers during his confirmation hearing Tuesday. “I would say this, I think truth-seeking is more important than repetition. If one has a press conference, one wants to deliver some important news.”
Ever since Greenspan introduced the first post-meeting statement in the mid-1990s, the central bank’s communications have gradually increased toward greater transparency. The trend accelerated during the global financial crisis, as the Fed began using unconventional tools that required extensive public explanation.
Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments
The first post-meeting press conferences started on a quarterly basis with then-Chair Ben Bernanke in 2011, followed by the introduction of the so-called dot plot, or interest rate projections in 2012, and then current Chair Jerome Powell’s move in 2019 to hold press conferences after every FOMC meeting.
Matt Luzzetti, chief US economist for Deutsche Bank, wrote in a note that Warsh’s leadership could “usher in a shift in central bank communication, potentially including a break from the (post-financial crisis) trend toward ever-increasing transparency.”
Warsh noted in Tuesday’s hearing that the economy is still dealing with ripples from the inflation spike after the pandemic, in part because officials used forward guidance, which Warsh said caused them to hold forecasts longer than they should have, compounding their initial missteps from 2021 and 2022.
“The Fed tells the whole world what their dots are going to be, what their forecasts are going to be,” Warsh said. “Then they hold on to those forecasts longer than they should. I think that if the Fed were to wait until it gets into a meeting before making a decision, that incremental deliberation can keep the central bank from compounding its errors.”
Wilmer Stith, senior bond portfolio manager at Wilmington Trust, said that while he doesn’t think Warsh will walk back as much communication as the market expects, any pullback is likely to rattle markets.
“That’s just going to result in potential greater volatility as we’re confronted with more dynamic policy adjustments versus knowing exactly what the Fed is looking at and calibrating the expected changes,” said Stith.
“I doubt he wants to go from ‘let there be light’ to now there’s just darkness in a very short period of time, because I think that would just exacerbate the volatility,” he said.
One key question, said Esther George, former president of the Kansas City Federal Reserve: How will Warsh lead the charge for major changes in communication once the central bank has gone this far in being transparent?
“It’s hard to say you take away something if you don’t offer something that provides sort of a good substitute in that vein,” she said.
While Warsh indicated that he favors more restrained communication, it is likely to be difficult to prevent the heads of regional Fed banks from publicly speaking. The presidents of the 12 regional bank districts are obligated to speak with key constituents in their districts.
Luzzetti also pointed out that Warsh would enter the Fed at a time of heightened concerns about central bank independence. Any move to restrict communications from other officials could be viewed as an attempt to quash alternative views and dissent.
“While Warsh may desire a more streamlined, ‘one voice’ message, institutional and political realities make it improbable that he could or would significantly rein in communications from regional Fed Presidents,” Luzzetti wrote.
Read more: How jobs, inflation, and the Fed are all related
That could ultimately hinder his policy agenda.
“If Warsh were seen as silencing his colleagues,” Luzzetti wrote, “it could be far more difficult to coalesce the Committee around his views.”
And while the Fed under Warsh would be different, how quickly it changes will depend on his ability to win over colleagues.
The entire Federal Open Market Committee would have to agree to make changes to the Fed’s interest rate projections and how those are released. Powell took a stab at that in his tenure, but told reporters the effort fell flat, so the central bank left things as they are now.
George said she sees this as a year of building consensus and laying out a strategy for how to tackle changes.
“I just think it’s the reality of working within a large committee and trying to bring the organization along,” she said. “If you come in and try to push hard for change that the committee hasn’t had time to calibrate, I don’t know any organization where that works as smoothly.”
Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance she covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram.
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