‘New Chapter’ in Old Bottles at Federal Reserve Board

In his second interest-rate meeting press conference as Federal Reserve Board chair, Kevin Warsh looked more to the past than the future of monetary policy.

While noting the importance of substantive deliberations among Federal Open Market Committee members, Warsh emphasized the Fed has entered a “new chapter” in its history. Yet the subtext of his remarks – and notable in his previous statements – was a desire to return the central bank to its less transparent past where the inner workings of policymaking were shrouded in secrecy. And that came with a large dollop of gaslighting by the Fed chair.

Warsh put a happy face on an economy still finding its footing in the post-Covid era by proclaiming its “impressive resilience” despite nagging inflationary pressures and uncertainty from conflict in the Middle East and ongoing tariff fluctuations.

“Even with recent shocks, the trends are positive and reveal solid growth,” Warsh said in his remarks. “We understand that five-plus years of inflation above target cannot be cured in nine weeks – or a single month of modest price increases.”

But the message was not just that the economy is doing fine. The implications Warsh laid out for the Fed’s new chapter include less information from monetary policymakers, a position he has repeated since his nomination to lead the central bank.

Specifically, Warsh defended his plans to remove any hint of economic forecasting from Fed statements in the guise of letting markets react to events as they happen as a palliative to an overactive Federal Reserve.’

“Market participants are learning to play the ball – not the referee – and market prices will continue to respond iin the direction and magnitude they see fit,” he said. But that’s a bad analogy. The Fed isn’t an impartial arbiter of the economy it is an active participant. The FOMC is not calling balls and strikes but can change the rules of the game at will. Combined with the new policy of less forward guidance from policymakers, it is a step backwards in terms of transparency.

The ability of investors, analysts and consumers to understand Fed thinking in advance of interest rate meetings removes a level of uncertainty from the financial equation and can lessen shocks to the system from unanticipated monetary policy moves. Having a feel for how the Fed is likely to react allows markets and consumers alike to make more informed decisions and can help reduce panicked reactions.

Despite Warsh’s contention that uncertainty does not mean a lack of clarity, the truth is the opposite. By seeming to return to an earlier era when the Fed received less attention and its inner workers were shrouded in mystery, Warsh is depriving the public of the ability to be more than a mere cog in the economic machinery.

His contention that the Fed “need not always and everywhere be the center of attention” is not about the central bank sticking its policymaking nose in areas it once stayed clear of. It is an effort to tell the public to mind their own business and let the “experts” handle the economy. The problem with that, of course, is the public is the economy and it is very much their business why and how the Fed makes policy decisions.