Kevin Warsh used his first meeting as Federal Reserve chairman to announce a break with the communications regime that the Fed has deployed for nearly two decades. The policy statement shrank. Warsh withheld his own dot from the Fed’s interest-rate projections. He announced the end of forward guidance and told investors to spend less time trying to anticipate the Fed’s policy and more time watching the economy.
The bigger picture here is that Warsh has announced the end of financial crisis-era monetary policy and a return to normalcy. Back in the bad old days of the global financial crisis, the Fed cut rates all the way down to zero. Unwilling to experiment with negative nominal rates—which was probably wise—the Fed instead sought additional stimulus by promising years of extraordinary accommodation. Those promises pulled down expected short-term rates, which lowered bond yields and lifted asset prices. Communication—and especially forward guidance—became an instrument of monetary policy because the Fed needed markets to carry its intentions across the yield curve.
Warsh has inherited a funds rate far above zero. The Fed can change that rate whenever officials decide economic conditions warrant a move. The emergency need to steer long-term rates through promises about future policy has passed. Warsh has been very explicit, for years, that the style of communications and the provision of forward guidance that is appropriate during a crisis does not fit the needs of monetary policy outside of a crisis.
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