Warsh wants a quieter Fed: Markets will have to pay more attention to data

The President of the American Federal Reserve Kevin Warsh, on Friday delivered his first speech at the annual Fed symposium in Jackson Hole since taking office in May, stating that inflation remains too high and warning that interest rates could rise again if greater progress is not made in easing price pressures.

In his long-awaited speech in Jackson Hole, Wyoming, Warsh avoided giving clear guidance on future Fed moves. He did not specify under what circumstances the central bank would respond by changing interest rates.

However, he clearly expressed concern that inflation remains high.

– Although inflation data this summer has been better than expected, it does not tell me that the underlying trends have significantly improved – said Warsh.

– We must ensure that core inflation is moving towards our target, clearly and quickly enough. Otherwise, we have more work to do. That is our job and our obligation that we must fulfill – he added.

His words immediately resonated in the markets. Stock indices did not change significantly after the speech, but yields on U.S. government bonds rose sharply. Additionally, many are now more convinced that the Fed will raise interest rates at its September meeting, CNBC reports.

According to Warsh, inflation is currently the main issue that the Fed should address. At the same time, he showed a relatively high degree of confidence in the U.S. economy, stating that it appears to be stronger.

As before, he highlighted the benefits of artificial intelligence development and assessed that consumption by businesses and households remains stable. The slowdown in employment, he said, is not due to a weakening economy but stagnation in the labor market.

Warsh also used the speech to present his view on how to conduct monetary policy, while avoiding giving concrete indications on how the Fed should act to achieve its goal: price stability and full employment.

– Today I stand here committed to discipline, not decision – said Warsh in a prepared speech before a group that included his colleagues from the Federal Open Market Committee (FOMC), as well as economists and media representatives.

Returning to the Pre-Financial Crisis Approach

In recent months, Warsh has faced criticism for his unclear approach to monetary policy, especially at a time when inflation continues to significantly exceed the Fed’s target of two percent. He is particularly critical of so-called forward guidance, the practice by which the central bank gives advance indications about future moves. He believes that markets should react to economic data, not to statements from Fed officials.

– You can call it a draft… you can call it a roadmap… just don’t call it forward guidance – he said.

His broader message was that the Fed needs to change the way it communicates with financial markets and the public.

Since taking office in May, Warsh has launched five working groups analyzing various aspects of the central bank’s operations. One of his main goals is to reduce the market’s dependence on any single statement from Fed officials.

– A quieter Fed, with a clearer purpose in communication. The Fed has a key role in the economy and in the markets. Our tools are powerful. We determine the direction of short-term interest rates. And market participants will always try to predict what we will do next. But we should not encourage a system in which market participants primarily look to the Fed to decide what their next move will be – he stated.

Warsh’s approach differs from that of his predecessors, who often used Jackson Hole to send signals about the direction of interest rates, announce changes in monetary policy, or present new approaches to conducting monetary policy. At last year’s gathering, then-Fed Chair Jerome Powell hinted that interest rate cuts were forthcoming, which spurred a strong rally on Wall Street.

Warsh, however, is trying to return the Fed to an approach that prevailed before the financial crisis, when markets received fewer direct signals about future moves from the central bank, and the Fed made less effort to guide their expectations.

– During my term as president, my colleagues and I will strive to build more reliable models and more robust rules that will guide monetary policy decisions. We will do this aware that the precision of economic forecasts is still only an aspiration. Given how quickly geopolitics, global supply chains, and technology change, it is wise to be humble about what we can and cannot know – he concluded.