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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