‘free For All’: Where Markets Are Getting Their Fed News As Warsh Stays Mum

Federal Reserve Chair Kevin Warsh has kicked off his tenure atop the central bank by pointedly saying little about his views on the outlook for the economy and interest rates.

But markets are still hearing plenty from the Fed.

Other U.S. central bankers are quickly filling the void, feeding investor expectations that the Fed will ultimately hike rates this year, perhaps the most crucial question facing the economy. In the past week, nearly a third of Fed officials have weighed in on where policy might be heading. Warsh has said next to nothing.

The Fed chief is the world’s most important voice on economic policy, and Warsh's decision to stay quiet is a break from the decades-long practice of the chair providing key signposts for global investors. The lack of any clear signal from the top of the institution risks stoking volatility in financial markets, if expectations whipsaw about what the Fed might do, and makes it harder for businesses and households to plan for the future.

“The chairman’s power is basically the power of persuasion and forging consensus,” said Neil Dutta, head of U.S. economic research at Renaissance Macro. “You’re playing the role of the adult in the room and taking all the cacophony of views and forging a consensus. If Warsh doesn’t have a strong view, or he doesn’t care to articulate his view, then you’re kind of creating a free-for-all.”

Warsh, for his part, argues that Fed statements previewing potential actions can make policymakers “prisoners of their own words” and create more confusion if central bankers react to high-frequency indicators.

At his first press conference last month, for instance, he barely addressed the nation's job market, one of the key metrics for determining whether to raise rates. The government will release the June employment report on Thursday morning.

Warsh doesn’t seem fazed by critiques of that stance. At an event hosted by the European Central Bank on Wednesday, he batted away questions about whether he should provide more information about how the Fed might respond to various economic scenarios. He also hasn’t signaled displeasure with his colleagues for weighing in.

“If I look at trigger-pullers, people that are making decisions in the bond market, in a range of markets, volatility is not up, it’s down,” he said on a panel in Portugal with fellow central bank heads. “Yields aren’t up, they’re down. Inflation expectations are down. So I hear this, as if people don’t understand. I think they actually understand quite well.”

That’s not exactly the message from Wall Street. Many investors are sympathetic to the notion that the Fed doesn’t need to strongly hit at a particular policy path, but they do want more context about Warsh’s view of the forces shaping the economy. After all, higher inflation doesn’t always necessitate higher rates, particularly if the Fed believes that easing tensions in the Middle East will help cool prices.

Some market participants said that while they expect Warsh will gradually reduce the amount of information the institution formally provides to markets and the public, his current stance will be untenable over the longer term.

“I kind of doubt that zero forward guidance is going to be a hallmark of the Warsh Fed,” said Guy LeBas, chief fixed income strategist at Janney Capital Management.

Scott Wren, senior global market strategist for Wells Fargo Investment Institute, said markets previously contended with far less information from the Fed, and it’s only been in the last 25 years or so that transparency measures have ramped up.

But, “it’s going to take a while for the market to get used to” making do without the information they previously had, he added. “I view this as a multi-year period transition.”

Speaking alongside Warsh in Portugal, ECB President Christine Lagarde highlighted the risks of so-called forward guidance for rates — namely, that it can unhelpfully tether central bankers to a path that might not end up being optimal. But she said she aims to provide “framework guidance, so that those interested in how we come up to a particular decision appreciate what we take into account, what intellectual process we go through, what indicators we are particularly attentive to.”

For now, Warsh’s colleagues are obliging the market's curiosity, providing their thoughts on how the economy might evolve, which have helped form investor expectations alongside forecasts that every policymaker submitted at the Fed's meeting last month — except the chair.

“We’ve got inflation that’s too high,” Cleveland Fed President Beth Hammack told CNBC this week. “If that continues, it may mean that we need higher interest rates.”

“In March, I had penciled in one rate cut by the end of the year. In June, I’ve changed that to one rate hike by the end of the year,” Minneapolis Fed President Neel Kashkari said on a panel at the Aspen Ideas Festival on Friday.

Sounding a slightly different theme, New York Fed President John Williams said in remarks posted last week that the current stance on rates is “well-positioned” to bring inflation back to the central bank's target of 2 percent. But generally, the message from the Fed over the last couple of months is that the disposition to be “hawkish,” or tougher on inflation, has been spreading.

Fed board member Christopher Waller, an appointee from President Donald Trump’s first term whose comments have long been closely tracked by markets, said in May that he could “no longer rule out rate hikes further down the road if inflation does not abate soon.” He will speak on Monday at a conference in Rome.

“For whatever reason he may have, Warsh has allowed other people to fill the vacuum,” Dutta said. “That is, on net, hawkish.”

“You’re kind of just outsourcing policy to the median swing voter,” he added.