Federal Reserve Chair Kevin Warsh has scrapped a two-decade-old practice of forward-looking guidance in FOMC statements, telling markets to react to economic data instead of rumors. The shift comes as the Nasdaq Composite and other major benchmarks trade near record highs, and after three FOMC members dissented last month in favor of a rate hike.
Kevin Warsh is 11 weeks into his term as Federal Reserve chair. In that time, he has already ended a practice that survived every FOMC statement for more than two decades. He was sworn in on May 22 as the 17th chair since the Federal Reserve's founding in December 1913. He then launched five independent task forces to help the Federal Open Market Committee (FOMC) improve its monetary policy oversight. The change lands as the Nasdaq Composite has climbed to a new high this year, alongside the Dow Jones Industrial Average and S&P 500.
Fed ends its guidance tradition, then explains why
The Kobeissi Letter first reported the change on June 17, when Warsh confirmed the Fed had dropped forward guidance. He argued forward guidance isn't a role the central bank should play, and said he prefers that equity and bond markets react to economic data and not rumors.
Nine words define his inflation plan
Warsh's plan for taming inflation rests on reading markets, not signaling the Fed's next move. At his press conference after the July 28-29 FOMC meeting, he answered a question from CNBC's Steve Liesman about the missing guidance by pointing to markets themselves. According to The Motley Fool: "Letting buyers and sellers meet at prices for Treasuries" — the nine words Warsh used to sum up his current approach to inflation.
Dissent and bond yields do some of the work
Three FOMC policymakers dissented at the latest meeting in favor of raising the federal funds target rate by 25 basis points. Meanwhile, a rapid rise in yields at the long end of the yield curve — the 10-year and 30-year Treasury bonds — is increasing borrowing costs and doing some of the Fed's work in fighting inflation. Although a rate hike remains on the table, Warsh appears content to let the bond market dictate the pace.
Source: The Motley Fool
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