Warsh Wants a Quieter Fed. The Bank of England Shows How
Twelve years ago, Kevin Warsh led a review of the Bank of England that urged it to stop talking so much. Now, the tables have turned. And ironically, it’s the Bank of England that may offer some clues as to what a Warsh-led Fed could look like.
Warsh has never been a fan of forward guidance. His view is that central banks have spent too long holding markets’ hands. By offering ever more signals about the future, they have confused investors as much as they have comforted them.
He’s got a point. I was thinking back to June 2022, when the famously signalled it would raise rates by 25bp the following month, only to get egg on its face when it delivered 50bp instead. The had its own awkward moment in 2013, when then-Governor Mark Carney (what happened to him?) said rates would not rise until unemployment fell below 7%. Officials thought it would take three years. It took five months.
But talking less is not the same as saying nothing.
Warsh said this week that the Fed is the referee rather than the player. But actually it’s neither: it’s the manager. It is the one responsible for inflation and unemployment. Warsh is right that you don’t need to guide markets through their every move, but you do at least need to give them a rough idea where the goal posts are.
This is where the Fed’s challenge now lies. By offering little or no detail on either its outlook or the data it is watching, markets have been left with a confused message on how policy will respond.
The minutes from June’s meeting hinted that many officials thought rates might need to rise in September unless inflation cooled quickly. Yet at this week’s press conference, Warsh downplayed both the recent downside surprise in inflation and the importance of the next couple of readings.
Financial markets have given their verdict: expectations were pared back but longer-term inflation expectations drifted higher after this week’s press conference. Investors seem to be having their doubts about Warsh’s commitment to keeping under wraps.
Something will eventually have to give, or else the Fed might find itself having to raise rates, not because of the data, but to reburnish its inflation-fighting credentials.
This is where the Bank of England comparison looks appealing.
Governor Andrew Bailey is not especially keen on forward guidance either. Compared with the ECB, the Bank rarely offers explicit signals about the next move in rates unless market expectations become badly misaligned. Nor does it appear particularly concerned about surprising investors on decision day.