see-sawed, then fell<\/a> Wednesday after the statement and news conference. The yield on the 10-year Treasury, which strongly influences mortgage rates, jumped Wednesday to 4.49% from 4.43%, though it fell back in Thursday trading. The yield on the 2-year Treasury, which closely tracks expectations for Fed action, was 4.16% Thursday, up sharply from 4.05% before the Fed’s meeting. The broad S&P 500 stock index dropped 1.2% Wednesday. <\/p>\nSuch swings could be a sign of things to come. Previous chairs have signaled the Fed’s next moves clearly enough that financial markets have largely anticipated the central bank’s actions. But Warsh has frequently cited as a model former chair Alan Greenspan, whose circumspect comments often kept investors guessing. <\/p>\n
Greenspan, who served as chair from 1987 to 2005, did usher in the statement the Fed now issues after each meeting announcing its decision. The first statement was issued Feb. 4, 1994, and said the Fed would increase its key rate for the first time in five years. The move caught investors off-guard and the Dow Jones Industrial Average plunged 2.4% that day.<\/p>\n
The paring back of Fed communications is part of a larger package of potential reforms to the central bank’s operations that Warsh signaled Wednesday. He announced that the Fed will set up five task forces to examine the Fed’s communications, its balance sheet, how it analyzes and gathers economic data, the impact of AI on productivity and jobs, and the frameworks it uses to analyze inflation. <\/p>\n
Warsh said the communications task force would consider changes to the quarterly economic projections the Fed issues as well as look at other recent innovations, including press conferences. Former chair Ben Bernanke was the first to hold them, though he did so only after every other Fed meeting. Warsh’s predecessor, Jerome Powell, shifted to holding them after every meeting. <\/p>\n
Such steps are a sharp contrast with the 1990s, when Greenspan never explained a Fed decision, on the record, to reporters. Warsh could ultimately dial back some of the Fed’s increased transparency.<\/p>\n
\u201cThis is a big change in how the Fed has conducted itself since the (2008-2009) global financial crisis,\u201d Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said. “Since then there has been a one-way train to greater communication, more transparency, and more forward guidance. Warsh has now put that train in reverse.\u201d<\/p>\n
Previous Fed chairs, starting with Bernanke, have seen a clear benefit to more communication: It helps guide the markets in the direction the Fed wants. Fed officials control a short-term interest rate, but the rates that affect the economy \u2014 such as the yield on the 10-year Treasury \u2014 are heavily influenced by investors’ expectations for inflation and economic growth. By telegraphing their next moves, policymakers can cause those longer-term rates to change even before the Fed adjusts its own benchmark rate. <\/p>\n
Yet Warsh’s view is that financial markets have become too dependent on Fed guidance. Instead, he wants investors to gauge where the Fed may move next by examining economic data and making their own judgments, which the Fed can then consider as part of their assessments of where the economy is headed. <\/p>\n
\u201cFinancial market prices are probably the most important source of information to guide central bankers,\u201d Warsh said at Wednesday’s news conference. <\/p>\n
David Andolfatto, an economics professor at the University of Miami and former economist at the St. Louis Fed, said he agreed with Warsh that forward guidance has flaws. It can be easily upended by unexpected events, he said, such as Russia’s invasion of Ukraine or the Iran war. <\/p>\n
But the chair should set out guidelines for how the Fed will react to unexpected events, Andolfatto said, or to challenges such as the persistent inflation it is grappling with now, yet Warsh so far hasn’t done so. <\/p>\n
\u201cI\u2019m with him on dispensing with forward guidance, but you have to replace it with a contingency plan,\u201d Andolfatto said. \u201cIt’s not enough to say, trust me, we’ll keep inflation at target.\u201d <\/p>\n
Ironically, Warsh’s decision to drop forward guidance may empower the other 18 members of the Fed’s rate-setting committee, Pearkes said. Those officials \u2014 six members of the Fed’s governing board, plus the presidents of the 12 regional Fed banks \u2014 frequently give public speeches, and their remarks will get even more attention as financial markets seek clues about what the Fed may do next. <\/p>\n
A big challenge to Warsh’s approach will come if there is a sharp financial downturn or economic crisis, as occurred during the COVID pandemic. In those circumstances, economists said, forward guidance can play an important role calming markets. <\/p>\n
\u201cWhether it will stand the test of time and he will behave this way for five years is a very different question, but one that we’re going to have to wait for events to unfold to get an answer to,” Pearkes said. <\/p>\n<\/div>\n
\n
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