What investors really need from the Federal Reserve is not another non-answer, economists say: they need Chair Kevin Warsh to prove he can successfully communicate the central bank’s strategy. As the Fed’s next policy meeting approaches, markets are growing frustrated with a communications approach that leaves them guessing about where rates are headed.
Warsh has made his philosophy clear since taking the chair: the Fed should say less about its internal thinking so investors form their own view of the economy. His message to markets, as he told lawmakers, is to “play the ball, don’t play the Fed”.
Federal Reserve (Credits: MarketWatch)
Warsh’s Quieter Fed: Why Investors Are Frustrated
The frustration is easy to understand. For more than a decade, investors were trained to read the Fed’s every word, and forward guidance itself worked as a policy tool: when the Fed signalled its path, bond yields, mortgage rates and the dollar moved ahead of any decision, doing part of the tightening or easing in advance.
Warsh opposes giving guidance on whether the Fed will hike, cut or hold at upcoming meetings, and he has set up five task forces to review how the central bank works, covering communications, the balance sheet, data sources, productivity and jobs, and the inflation framework. Communications is the one most likely to change how markets trade.
What Investors Need From the Fed Now
Goldman Sachs’ Investment Strategy Group has warned clients that weaning markets off Fed guidance could come with a price: longer policy lags and more volatility. If the Fed tells markets less, the bank argues, it may take longer for policy to work through financial conditions, and the adjustment could be bumpier for both markets and the real economy.
The tension has been on display in recent weeks. Warsh’s deputies, New York Fed President John Williams and Vice Chair Philip Jefferson, stepped in to cool expectations of an immediate October hike, saying there was “no urgency” to move now, effectively delivering forward guidance through the back door. With the Federal Open Market Committee meeting on October 27-28, investors are watching closely for any clearer signal of the strategy ahead.
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Source: MarketWatch — read the full story there.
