I have to say the FOMC press conference was a breath of fresh air.
By Wolf Richter for WOLF STREET.
The FOMC statement – short, crisp, and denuded of any kind of “forward guidance” – showed the way. And Fed Chair Warsh hammered it home during the press conference (my analysis of the statement and some of Warsh’s comments here).
Forward guidance is one of the official monetary policy tools that the Fed and other central banks have liberally used to manipulate the bond and repo markets into implementing their monetary policies. And the Fed under Warsh dispensed with it.
Back in 2022, the FOMC under Powell, after hiking by 75 basis points, would issue a statement with fairly hawkish forward guidance, with more big rate hikes on the horizon. Then Powell would give his press conference, which would be packed with reporters asking repetitive, leading, and often silly questions to get Powell to say something that was wishy-washy enough to be twisted into “dovish” somehow.
And with the press conference not even halfway through, the loud voices in the social media screamed “Powell was dovish,” no matter what he said, even when the next rate hike was 75 or 50 basis points. It was one of the most amazing spectacles: watching the Fed hiking by 50 basis points and by 75 basis points at a time, with many more rate hikes to come, and reading the commentary that “Powell was dovish,” all of it in an effort to pump up the markets.
Warsh had no room for that at all. He didn’t give an inch. He swatted down the leading and repetitive questions that were fishing for forward guidance, kept saying that forward guidance had been dropped, that markets are very good at looking at the incoming data, and reacting to it, and that they should be doing that, instead of trying to figure out what the Fed was telling them it would do.
But crucially, he said that markets – such as the bond market – “are probably the most important source of information to guide central bankers.” The Fed looks at the markets as one of its big data inputs, but as markets look at the Fed’s forward guidance instead of at incoming data, then the Fed effectively looks at a reflection of its own forward guidance instead of the markets’ interpretation of the incoming data, which caused the Fed to get distorted information.
Here is his crucial rationale why forward guidance was dropped.
“I think financial markets [particularly the bond market and the repo market] perform best when they react to incoming data. Financial markets work less efficiently when they ask the question: how will the Federal Reserve react to that incoming information? The more that markets are paying attention to what’s happening in the real economy, deciding what’s good data and what’s less-good data, the more financial markets can price what they believe is the most likely and what are the tail risks.
“Financial market prices are probably the most important source of information to guide central bankers. But when all the financial markets are doing is reflecting back what we’ve said, we’re taking the most important source of information and we’re being blind to it.
“I’d like us to create a system where those blinders come off, where markets are following data that they efficiently think is reliable and they’ll be watching data, and we’ll be watching data. They’ll come with better information through market prices to us. We can make more informed decisions.”
And so big changes are on the table at the Fed. But Warsh himself cannot change anything major. He has to get a majority of the FOMC’s 11 other voting members onto his thinking.
He proposed five expert taskforces whose members, drawn from the Federal Reserve and outside experts, will be willing engage in a “good family fight” to study and analyze the issue and come up with recommendations.
These five taskforces would focus on:
- The Fed’s communications, including forward guidance.
- The size and composition of the Fed’s balance sheet: They will “review the benefits and risks of the current ample reserves regime and the composition of the balance sheet” and “assess alternative frameworks for the conduct and operation of monetary policy.”
- The Fed’s reliance on existing data sources that provide often unreliable data.
- The Fed’s inflation framework. This could be tricky for the bond market. Though vigorously denying it in order to keep long-term Treasury yields from spiking, the Fed has had effectively an inflation target of 3-4%: Rate cuts came at 3% and rate hikes are possibly coming above 4%, to let the economy “run hot,” in coordination with the government, because that higher rate of inflation and a hot economy may be the only palatable way of making the “unsustainable” US fiscal mess more manageable.
- Productivity and jobs in the era of AI.
Whatever these taskforces will end up recommending, everything would still be the decision of the FOMC’s 12 voting members – they will have to vote on everything, Warsh pointed out.
In terms of the timing of the taskforces, he said:
“I’m still in the business of recruiting and finalizing the taskforces. My expectation is the taskforces will begin work in the next couple of weeks. And we’ll start to get some more information from them, some more framing of how they see things, starting in the fall, and hopefully most, if not all, concluding by year-end.”
That gives the taskforces six months – and present their recommendations after the mid-term elections.
And when reporters pushed him with leading questions over and over again to give some sort of oblique wishy-washy forward guidance, he refused, sometimes with humor. People who were hoping that these questions would lead Warsh to say something wishy-washy that could be interpreted as “Warsh was dovish” were disappointed. That trick isn’t going to work this time. Financial markets will have to look at incoming data and do their jobs reacting to it.
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Any response that is off the record about what the FOMC 12 voting members think about the 5 task forces?
Most of these topics have already been discussed by various voting members. The topics are not new. The issue of Fed communications was heavily discussed for the 5-year “Framework” that the Fed released last year, but they couldn’t agree on anything, Powell had said. Shrinking the balance sheet further and changing its composition was also discussed many times in public, but it remained there. So the topics are not new. The taskforces are. Warsh is trying to get something changed. Before then, individual members discussed one or the other topic in a speech and maybe made their case behind the scenes, and nothing ever came of it.
The dotty art projects were fun, but let’s get back to being serious business. Work to do.
Personally I agree with the Fed Chairs policy justification. The era of monetarism has run its course and has become useless as a policy tool.
IMO, the correct path forward for the 95 pct of the people is lower asset prices rather than inflation. Two divergent goals yet suggesting at least a hint of the underlying psychosis
Bankruptcy in a fraudulent economy is part of the cleansing ritual.
I am not fan of Trump but he, perhaps accidentally, did well to nominate Warsh as fed chief.
Too soon to say. Greenspan, Bernanke, Yellen, Powell – been fooled too many times. All of them played the vast majority of Americans as fools with interest rate repression and helping blow huge bubbles.
We will see what happens.
“Meet the new boss, same as the old boss.” “The Who,” song: “Won’t Get Fooled Again.”
I hope so but we’d see if he is able to bring down inflation to 2%.
FED’s mandate to have 2% inflation, has been not met for last 5 years plus.
We now need five years of 0-1% inflation to balance out the damage of the last five years. I can’t imagine anyone being unhappy about prices staying flat for a long time.
Debtors (e.g. the investor class and governments)
NEVER gonna happen now with massive run-away govt debt
6% gonna look nice soon enough
only more FRAUDULENT govt debt to be issued(never intend on repaying)
He said he wants a 2 left of the decimal place. That means 2.99% or lower as the target rate. It also means no more talk of rate cuts any time soon.
2% inflation is not a statutory mandate.
Wow. You mean all those billionaire bond traders and hedge funders are going to have to do their jobs rather than just being Fed whisperers. What ever will they do???
Good on Warsh! I liked him when he said he was going to shrink the balance sheet further, and this is icing on the cake. I think Greenspan created this peak monstrosity of Fed prognostications because he enjoyed the media adulation of being called Maestro and having everyone wait breathlessly at his feet. Hint: if a government official is being called the Maestro, it’s no longer capitalism…
I’m cautiously optimistic about his term, and his creation of these committees to get support for his changes shows he’s a smart political player. Let’s see what he manages to do.
Also, what’s the over/under on Trump throwing him under the bus by the November midterms?
Twenty years ago I was working evaluating what we referred to as machine learning what I think has rebranded as AI.
There are three observations that I have come away with about AI
Firstly is the fact that an AI model can never give the same answer twice in a row. The answer that an AI model resolves is within the normal distribution of the data set upon which it was trained
Which leads into the obvious conclusion that AI can never learn. It is trained on yesterdays data which automatically rejects learning as somehow is a terrorist activity
Of course the obvious question, which no one asks, what exactly are you training your AI model to do. I have become convinced that AI is an accumulation of human experiences that can be summed up as the most likely outcome is that the net will be rendered useless by the AI bot traffic issuing thier drivel
Thirdly is that IMO the AI is a ruse to hide the actual plot to overthrow Amerixa
This is so wrong it’s funny.
As someone trained in the applied, adaptive statistics that is commonly referred to as machine learning: none of this is correct.
Autoregressive language models *can* give the exact same answer twice, it’s just quite unlikely. The distribution of the next output token is a heavily conditional distribution (it depends on what came before), but the distributions are never normal. The normal distribution doesn’t lie over a positive integer range which is what output tokens are.
No comment on terrorist learning or the overthrowing of America because lolwut.
But maybe I can nerd out about stats in the wolf comment section and somebody learns something!
Good riddance to Bernanke, Yellen and Powell, the three musketeers of ZIRP and QE that artificially raised asset and housing prices while enriching bank CEO’s with free depositor money at negative real interest rates.
The Fed has been the handmaiden of the stock and bond markets for way too long and the idea they influence inflation and employment is poppycock.
Corporations do deals based on their cost of capital. No one hires more people when interest rates are cut. And consumers get no break on usurious rates charged by credit card companies and banks on personal loans. Car prices are jacked up when no interest financing is used.
All eyewash. Lets see if Warsh plows new ground at the Fed. They claim indepedence from the president but never from wall street with their Fed put.
The ghost of Arthur Burns is always watching.
I know that Warsh will be a busy man because of his position as Fed chairman. I would like to see Warsh team with Treasury Secretary Bessent so that serious conversations about our national debt can be established. The larger it grows, the more difficult any serious responses will be. The thing is, our country doesn’t have a problem with revenue. It’s just that Congress will not slow down or stop their spending ways. The more tax revenue, the more is spent (negatively) time and time again.
Dent would be inflated away like they have been doing for decades
But the debt has NOT been inflated away.
The national debt is at record all-time highs compared to every relevant metric: Debt/GDP, Debt/Taxes, Debt/Person, Debt/Median Income, you name it.
Just because they “say” the debt will inflate away doesn’t mean it is actually happening, or even going to happen.
The other side of that debt is a lot of very powerful, very wealthy organizations who will demand the pound of flesh they’ve been promised, one way or another.
Well I agree that the sugar high that monetarism as practiced by Ben Bernanke is currently still suspending asset prices through the excess reserve policy as evidenced by the obese Fed balance sheet.
A reservoir of liquidity that has driven the price far beyond the justifiable valuation
Powell’s Fed obviously intended to inflate the currency at a rate that would eventually make the net present value calculation like a pregnancy test turn positive
> our country doesn’t have a problem with revenue.
That’s arguable. When we have a pension plan (social security) where we more or less know how much we will be obligated to spend by law, but the tax revenues will not be enough to cover it, that’s a revenue problem. When we cut taxes, then turn around and start a war of choice, then decline to raise taxes to fund the war, that’s a revenue problem. I could go on. The solution is glaringly obvious. But in suggesting it, I almost feel like the spoil sport who points out that the emperor is not wearing any clothes, even though anyone with functioning vision can see that he isn’t. Higher taxes? Aww, no fun!
Task force creation is a classic corporate move intended to justify a predetermined course. Also, decrying ‘transparency’ is never a good sign. The Fed will become a black box, yet again.
I’m not impressed.
Warsh has signaled a reduction of the Fed in multiple capacities: eliminating forward guidance, reducing number of public statements, smaller balance sheet, etc. I trust that it’s to reduce the influence of the Fed on global markets and return to a less top-down style economy. I welcome that.
I agree that the results of the task forces are somewhat predetermined based on who Warsh selects. This all seems very political in nature and the results of the task forces will be less instructive to his colleagues on the FOMC and Fed governors. Political hoopla perhaps, but if it gets the changes implemented, useful hoopla.
A politicized Fed is something new?
Bah tenda…I’ll have anotha MMT!!
Just reviewed the June 17th SOMA and it’s increased again. You’ve wrote about it in the past detailing the increase in T bill sales. What the FED doesn’t want or need is a sell off in the long term Treasury market. I think the FED knows that it needs to keep a cap on the short term T bill rate to facilitate the increased borrowing. If, and this is a big if, they can get back to a more normal yield curve where they can finance T bills at “lower” rates and let the long term yield rise gradually to a typical bond yield curve that would be a significant accomplishment. That would entail getting a handle on inflation though.
Well the interest rate on the T bill set by the Fed which just yesterday left the short term T bill rate below the rate of inflation.
Which indicates that the new Fed Chair is all hat and no cattle
dang,
Your comment fails to understand how the FOMC operates. The Fed’s policy rates are voted on by 12 FOMC voting members. Warsh is only 1 of them. The other 11 voted to keep rates unchanged, as everyone knew they would. Nothing to do with Warsh. The Fed chair is not a dictator.
The seven members of the Board of Governors control the discount rate and rate of interest paid on excess reserves. The twelve members of the FOMC control the Fed funds rate, the overnight repo rate and the overnight reverse repo rate.
Of course you are correct. Thank you for this web site
The RMPs are $10 billion a month now. The weekly fluctuations beyond that have nothing to do with securities purchases but with interest income (which causes the balance sheet to go up one week, and then a couple weeks later to go back down) and inflation compensation from TIPS. The T-bill purchases of about $2.5 billion a week are so small that those technical changes overpower it, up and down. At this rate, the balance sheet is increasing at a smaller rate than nominal GDP, and the ratio of the balance sheet to GDP continues to decline.
Yes, but it’s still increasing.
The trend still continues to go up for treasury issuances year over year.
Warsh seems to have the same belief that former former Chair Greenspan had (and was relieved of) that markets will correct themselves. For those that have short memories, 2008 required massive gov’t intervention on global scale. Individual homeowners were left hanging while banks were made whole. Lack of preemptive regulation hurts working people, a lesson that Warsh apparently cares little about.
I thought Warsh left the fed over those moves back in the day.
If he left his prestigious position as a way of standing up for his principles then I wouldn’t underestimate him. Very few people, only true leaders, have the stones to do that.
Greenspan was a gold bug and a lover of the ridiculous Ayn Rand who ended up indigent relying on the social security system that she ranted against
I like that he said the task forces will have a “good family fight”. Get some good info and have a good conversation with a good bunch of experts to hopefully make some good decisions.
Hopefully our representatives can all be adults and have intelligent conversations to use as base for their decisions.
Wait and see what the results are.
A taskforce servers the same purpose as a consultant: giving leadership a justification for impopular decisions. It also offers a convenient scapegoat for when shit hits the fan.
To paraphrase that famous philosopher, Mike Tyson, “Every New Fed Head has a plan until they get punched in the mouth by Mr. Market.”
We shall see how long Chair Warsh’s tough talk lasts when the Ponzi Monetary System begins to implode, stonks crash, McMansion prices implode, and President Trump starts turning up the heat to slash rates.
My guess is : not very long.
Absolutely!
Here is my stupid thought of the day (sorry if I misread the article).
They need one more task force, and I think it’s actually #1.
Task force on crisis management and emergency monetary policy response.
It would be great to see a framework around when and for how long the monetary policy should respond in the face of a crisis. Define what is and isn’t a crisis first of all. A 10% dip in the S&P500 is not a crisis. It seems that since 2000, it has been one crisis after another, along with very, very, very… prolonged emergency monetary policy response. ZIRP, QE 1,2,3, etc. , covid stimmies, MBS you name it.
All of that crap was justified and enacted in the face of a (usual overblown) panic. This is a TERRIBLE way of making decisions.
So adopt a framework that requires discipline, limited durations, limited scope, etc. and don’t try to do too much as it often causes more harm than good.
I bring this up because many of the non-wolf pundits out there are mocking the new guy saying sure this all sounds great but as soon as anything bad happens it all goes out the window. There are many curious reactions out there to say the least; heck some folks even seem nervous about Warsh.
He may already be indirectly addressing it by being adamant about no forward guidance. If Warsh is successful (big if) , then The Fed will have more flexibility and agility to raise and lower rates as appropriate, rather than “smoothing” rate change trends over long time frames. Actions will speak louder than words (aka jawboning) if he can put his framework in place.
I agree with this. People have been in awe for years that stocks have stayed at ZIRP and QE valuations despite 5% rates (at one time) and QT.
The reason is simple. The market is not pricing itself based on what is happening, but what it BELIEVES will happen if there’s a hiccup. As long as the market believes that the Fed will come in with a fire hose to put out a candle, it’s as though ZIRP and QE are still going on.
The only way to break that, and the instinctive “buy the dip” is for the market to drop, and the Fed to not only do nothing, but to announce that a stock market crash is not a national catastrophe that requires monetary intervention. Will Warsh have the courage to do that? That’s anyone’s guess.
I read somewhere that Warsh is a very affluent person. And if I can hazard a guess, I think he would be heavily invested in the stock market.
I am sure his cohorts are too.
I see more incentive on his/their part to prop up the stock market than not too.
Unfortunate reality.
Warsh is heavily invested in non-traded shares of startups. They don’t react to the day to day vagaries of the stock market.
He will also have to divest himself of his stock holdings of companies. Funds are OK.
Yes, if he had the stones he could of said if you are increasingly taking on more risk because you think there will be a Fed Put please reconsider because this could possibly affect the health of the broader economy.
And there is no guarantee that the Fed will step in with bailouts caused by over-leveraged speculation.
They might have saved him the expense of creating task force.
I agree but I stipulate that I have been wrong for so long that my opinion is more likely to be wrong than right. Do the exact opposite of what I recommend
10% of Federal tax receipts come from Capital Gains. I would guess a good part of those gains are from Equities.
The Federal budget is already in deficit by 6% (or there abouts). Could the FED really stand by and allow a major and sustained drop in Equity prices that threatened to also reduce Cap Gains Tax revenues by multiple percentage points ?
Perhaps Warsh is the guy to say “the budget is not our business that belongs to the congress and the president”. If he can do that or mostly do that, it will be impressive.
I dont think it greatly matters what the fed does when the government is running a deficit of 6% to GDP. Inflation will run rampant and the fed cant raise rates because of how much it will impact the debt service.
So, if markets will tell the Fed what to do with rates then rates will rise.
Yep bond vigilantes will exact their revenge on this Fed who refuses to raise rates in the face of high inflation.
You can’t fire bond vigilantes so there ya go.
Why Warsh needs to get 12 fed members on his side to build majority. Why? Fed has not done his job in decades and we are sitting on a mountain of debt.
My message to Warsh. You are appointed by current president so you are good for next 2 years from any name calling. Even if next president is democrat, he or she is not going to fire Warsh or Fed will lose independence so he will finish his term.
Mr.Warsh, do it your own way and don’t bother about other 12 members and all this majority BS. Let’s see which members don’t want to act in the interest of American people and instead try to please their Wall Street buddies. You have a chance to go down in history as the greatest fed chair and man who saved America. You have already made generational money. What are you afraid of? Building majority is not going to get job done. Need radical leader who is going to make bold decisions in interest of american people and rest of the board members will have no choice but to follow you. Let’s GO!!
“do it your own way and don’t bother about other 12 members and all this majority BS.”
Making decisions in the interest of the American people used to mean democratic decisions guided by the wisdom of the Founding Fathers.
Your comment proposes autocratic rule by Warsh, which is inherently unamerican.
So where are we with all those democratic decisions? House and Senate is more divided than ever. We don’t see eye to eye if we have different views and cannot find common ground. We are sitting on a mountain of debt which looks absolute unrealistic from where we were just 6-7 years ago. I am not advocating abolishing Democratic Principles but founding fathers were visionary and so did many leaders throughout the world history. You can create a visionary path and people will follow you. It doesnt mean you are abolishing democracy.
“I am not advocating abolishing Democratic Principles…” right after “Need radical leader who is going to make bold decisions in interest of american people and rest of the board members will have no choice but to follow you.”
Thank you, this is helping me understand why we’ve gotten the administration we did…
Clearly todays fed job is to inject copious amounts of liquidity into the system without causing copious amounts of inflation. As In print but don’t get caught. As in how can we juice the goose and not get caught by this market who rides the short bus.
As always it works until the tide goes all the way out. Then The ruse stops and the shtf.
Like when green scam let all lenders lend on stated income and then pick a payment plans with interest only as an option for mortgages, then this stuff was peddled back to wallstreet as triple a rated paper providing fat commissions at every intersection along the way, and later the market called this a sub prime problem when it was created deep in the bowels of the fed. We cannot make any of this stuff up. I cannot wait to see what these new task forces concoct. We should see some real whoppers. Got popcorn?
“ where markets are following data that they efficiently think is reliable and they’ll be watching data”
Hmm there Warsh I think someone won a Nobel for this already… lol
1. Are we (as a nation) collecting the right economic data? 2. Are we (as a nation) drawing the right economic conclusions from that data? 3. Do we (as a nation) want the economic conclusions from that data?
Markets are already efficient.
It’s the theory.
Even if there are bad players and there are a ton of bad players.
It’s nothing one can argue away or put a magnifying glass on. The market figures it all out quickly.
Or as Charles likes to say “everyone has a Bloomberg terminal”
Go ahead Mr Warsh, raise those rates, get inflation under control! I triple dog dare you!
Interesting times.
That could happen in 2029 but no earlier.
Just buckle up and enjoy a can of soup doubling in price every year.
/s
“But crucially, he said that markets – such as the bond market – “are probably the most important source of information to guide central bankers.” The Fed looks at the markets as one of its big data inputs, but as markets look at the Fed’s forward guidance instead of at incoming data, then the Fed effectively looks at a reflection of its own forward guidance instead of the markets’ interpretation of the incoming data, which caused the Fed to get distorted information.”
George Soros has an interesting take on this phenomenon he calls “reflexivity”.
“The theory of reflexivity is a concept developed by investor and philosopher George Soros which posits that a two-way, self-reinforcing feedback loop exists between market participants’ perceptions and economic reality. Unlike the efficient market hypothesis, it argues that these biases can alter market fundamentals, consistently preventing markets from ever reaching an equilibrium.”
So where does the rabbit hole start and where does it end?
Inflation is accelerating along with interest rates across the board. We’re in Jimmy Carter 2.0 thanks to Powell and a Congress who would not cut federal spending in any meaningful way. Add in the useless Iran war for good measure. I got my utility bill for June. Up 10% with the same energy usage. Same increases for all fixed monthly expenses. Walsh has his work cut out for him. I wish him the best of luck in fixing the mess he inherited.
It’s unreasonable to pinpoint recent years inflation to one person. However, if there was 1 person I would blame for the k shape of the economy that we live in today, it would be Powell. F that guy, peace out.
Greenspan dies(as we all do):
“Greenspan’s legacy came into question in the final years of his term. The maestro was reluctant to confront asset bubbles, and his hands-off approach to the mortgage and derivatives markets helped inflate the housing bubble leading up to the financial crisis of 2008.
Greenspan later acknowledged errors in his free-market assumptions…
“Those of us who have looked to the self- interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” the maestro told lawmakers in 2008.
Greenspan also told lawmakers, “I was right 70% of the time, but I was wrong 30% of the time.”
The Financial Crisis Inquiry Commission’s final report stated:
“More than 30 years of deregulation and reliance on self-regulation by financial institutions, championed by former Federal Reserve Chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe.”
To paraphrase the Godfather: “He’s a pimp”….and IMO a flat out liar.
“Anyone who thinks that he is some kind of a stooge that’s been put in there to cut interest rates regardless of inflation is going to really, really be disappointed with Kevin Warsh,” said Gavyn Davies, co-founder and chairman of Fulcrum Asset Management and a former chief economist at Goldman Sachs.
“He’s not that kind of chair.”