Wall Street hadn\u2019t heard a peep out of Federal Reserve Chairman Kevin Warsh for a month, until he walked onstage for his keynote speech at Jackson Hole today. <\/p>\n
Warsh\u2019s speech at the Fed\u2019s annual gathering came with added scrutiny this year: Not only was it Warsh\u2019s first as chairman, but he has also caused analysts some discomfort with his pullback from giving now-familiar forward guidance (in which the central bank indicated the general direction of travel for the base interest rate).<\/p>\n
On forward guidance, Warsh stuck to his guns, saying: \u201cYou might know about my longtime discomfort with early pronouncements of future policy decisions \u2026 Forward guidance as a regular practice was adopted by my colleagues\u2014and me\u2014during the Global Financial Crisis.\u00a0It was essential at the time, and we introduced it with much fanfare.\u00a0<\/p>\n
\n
\u201cBut as with other legacies of crises past, I believe the practice has outstayed its welcome.\u00a0In normal times, the role of forward guidance should be limited and circumscribed; otherwise, it risks creating ambiguity in the name of clarity.\u00a0Oversharing policy deliberations and overcommitting to future decisions can lead markets, businesses, and households astray, and I believe when policymakers make quasi-commitments on interest rates throughout the cycle, we inhibit our own freedom to make the right calls when it\u2019s time to decide.\u201d<\/p>\n
His tone was firm: \u201cWe should not indulge a regime in which market participants are looking primarily to the Fed for their next trade.\u201d<\/p>\n
And while Warsh has repeated his commitment to the Fed\u2019s dual mandate of inflation at 2% and maximum employment, neither he nor his central bank staffers are living under a rock: Bond yields tracked higher following Warsh\u2019s July press conference, as markets digested a Fed on hold and the suggestion that markets may be doing some of the legwork for financial tightening that they had come to expect from the Fed.<\/p>\n
But more alarmingly\u2014for some corners of the street\u2014were the questions hanging over the established frameworks the Fed uses to make decisions about the base rate. Analysts questioned if these frameworks might be subject to change, searching for answers on how<\/em> policymakers were thinking, even if they didn\u2019t know what action it might prompt.<\/p>\nHere, Warsh shared insights. While his outlook on the economy wasn\u2019t necessarily rosy, it nevertheless described the balance of priorities within the Fed.<\/p>\n
Price stability is front of mind, he suggested, in the balance of risks in the Fed\u2019s mandate. He said: \u201cBut on the price-stability side of our mandate, the numbers are more concerning. The Fed\u2019s preferred measure of inflation, the 12-month change in the PCE [personal consumption expenditures] price index, stands at 3.7%, while the six-month change is 4.1%.<\/p>\n
\u201cNone of these measures are perfect, but they all tell a similar story: Inflation is running above our 2% target. So the Fed\u2019s predominant focus right now should be on prices.\u201d<\/p>\n
The employment side of the Fed\u2019s mandate is doing \u201cwell,\u201d he said, courtesy of a robust consumer and a \u201crematching\u201d of employers and employees after the COVID pandemic. He added: \u201cAs of now, I believe the labor markets are broadly consistent with full employment, but on the price stability side of our mandate, the numbers are more concerning.\u201d<\/p>\n
With speculation swirling as to how actively the Fed will commit to its mandate, Warsh moved to nix concerns: \u201cThere is one signal nobody can miss: The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank. And that is where it belongs \u2026 I stand here today committed to a discipline, not to a decision. My Fed colleagues and I are hardly the first to hold these positions in a time of great consequence. We are determined to redeem the time by doing our very best work.<\/p>\n
\u201cWe take our responsibility seriously, with humility and with resolve. So much depends on choices we make. Sound monetary policy helps households and businesses to prosper. When carried out effectively, it broadens and deepens the momentum of our economy \u2026 and helps to secure America\u2019s leadership in the world. And I know that our country needs us to think carefully and act wisely.\u201d<\/p>\n
Warsh\u2019s latest speech (at the time of writing) seems to have sidestepped any sharp reaction from markets: the price of gold\u2014a safe-haven asset relied upon during times of volatility\u2014dropped by approximately 1% during Warsh\u2019s speech. The VIX volatility index also declined 1%, while longer-dated Treasuries also lowered. The CME FedWatch index, which tracks Fed fund futures, shows 57% of traders believe the Fed\u2019s next rate move in September will be a hike of 0.25%, to the 3.75% level.<\/p>\n
Early reaction from analysts suggests Warsh learned from the pushback earlier this summer. Eric Winograd, chief U.S. economist at AllianceBernstein, wrote that while the Fed chairman\u2019s speech was light on details of central bank transformation, it did \u201ccorrect a couple of mistakes he made at his last press conference, reinforcing that PCE is the target measure for inflation and that interest rates are the Fed\u2019s primary tool.\u00a0<\/p>\n
\u201cThose corrections make the speech hawkish compared to his last remarks and should offer some relief to the back end of the yield curve, where some worries about Warsh\u2019s willingness to act with rates to bring inflation down contributed to rising yields.\u201d<\/p>\n
\u2018The productivity pixie\u2019<\/h2>\n
One thing some Wall Street analysts\u2014unusually\u2014didn\u2019t want to hear too much about was AI. As UBS\u2019s Paul Donovan quipped ahead of the speech: \u201cThe worst case would be a reiteration of Warsh\u2019s belief in the productivity pixie, and platitudes about future higher growth. Technology\u2019s impact on macroeconomic productivity is uncertain, and risks of a \u2018brain drain\u2019 from the U.S. and lower immigration also affect growth.\u201d<\/p>\n
The boomerang central banker hit on the topic early, but with questions rather than expectations as to how it might shape the Fed\u2019s mandate. Warsh said: \u201cWe recognize that AI is a new variable\u2014potentially a new factor of production\u2014that will have consequences for both the economy and the conduct of monetary policy. It opens some major lines of inquiry: Will the application of AI cause a significant, sustained rise in productivity across the economy? And if so, when?<\/p>\n
\u201cAmong the other yet-unknowns is the resulting market structure. It\u2019s not obvious where the returns on capital will land or on what timescale.\u201d<\/p>\n
He added: \u201cWe will be thinking through these matters with the help of a task force on productivity and jobs. My early check-ins with the leaders of that task force, and the four others, have been encouraging.\u201d<\/p>\n<\/div>\n
#Kevin #Warsh #Jackson #Hole #Wall #Street #glimpse #Fed #thinking<\/p>\n","protected":false},"excerpt":{"rendered":"
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<\/p>\n