Kevin Warsh, the Federal Reserve's chairman, is exploring whether the Federal Open Market Committee should meet fewer than its current eight times a year, extending his effort to cut back the central bank's communication with markets. Strategists warn the change could add volatility, even as the Dow Jones has climbed since Warsh took over in May.
A Fed source describes the discussion as mostly hypothetical, but Fed Chairman Kevin Warsh is weighing fewer Federal Open Market Committee meetings than the current eight a year, extending his effort to shrink the central bank's footprint on financial markets.
Since taking office in May, Warsh has curtailed forward guidance, shortened the Fed's post-meeting statement and given evasive answers at his two news conferences so far. According to DWS Group's George Catrambone: "Certainly, it's going to increase volatility." Having less transparency forces market participants to hedge or widen their range of expected outcomes, he added.
'Nothing magical' about eight meetings
The Fed's meeting count has shifted before: it met nearly monthly until the early 1980s, before shifting to eight a year under Paul Volcker. Minneapolis Fed President Neel Kashkari told CNBC Wednesday he is open to re-examining the schedule. Philadelphia Fed President Anna Paulson said Tuesday it's healthy to discuss the idea. Former Fed monetary-affairs chief Bill English called eight meetings close to the right number, but said he is more worried about Warsh's broader retreat from communicating with the public.
Dow climbs even as the Fed goes quiet
So far, markets have shrugged off the shift, either giving Warsh the benefit of the doubt or focused elsewhere on geopolitics. The Dow Jones Industrial Average has added about 3,500 points, or 7%, since Warsh took over from Jerome Powell on May 22. It was recently trading at 54,349.12, up 0.49%. The policy-sensitive 2-year Treasury yield has risen about 8 basis points since Warsh took over, while the 10-year yield has risen about the same amount.
Bond market and debt costs at stake
Fewer meetings could also widen the gap between short- and long-term rates, a pattern Komal Sri-Kumar of Sri-Kumar Global Strategies calls a bear steepener, as investors price in the Fed holding short-term rates low while inflation expectations rise. That risk matters for the bond market because the federal government cannot easily absorb a yield spike while it finances $31.1 trillion in outstanding Treasury debt held by the public. The Treasury Department expects to spend $1.3 trillion this year on debt financing. Treasury Secretary Scott Bessent, in a CNBC appearance Tuesday, described the Warsh approach as a “detox” for markets.
Warsh's next major test comes at the Fed's annual Jackson Hole gathering in late August, a stage prior chairs have used to lay out new agendas.
Source: US Top News and Analysis
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