Federal Reserve Chair Warsh is prepared to raise interest rates at the September policy meeting if inflation readings in the coming weeks come in hot and market expectations for tighter policy continue to rise, the Financial Times reported Thursday.
The report said the story lifted short-dated U.S. Treasury yields. That move came after a large Treasury selloff following last week’s Fed meeting, with Warsh still sticking to a leaner communication approach.
Warsh acknowledged communication mistakes, report says
According to people familiar with Warsh’s thinking cited by the Financial Times, he has recognized missteps in how he has communicated since becoming Fed chair in May. Those included not doing enough to reinforce the core message on price stability and creating market confusion over whether longer-term reform plans could affect near-term monetary policy.
The same people said those mistakes were not serious enough to make him abandon his broader reform direction.
After last week’s Federal Reserve meeting, long-dated U.S. Treasury yields climbed sharply, with the 30-year Treasury yield at one point reaching its highest level since 2007. Investors broadly viewed Warsh’s limited disclosures as weakening his credibility on inflation control, while inflation pressure tied to Trump’s war against Iran added to uncertainty around the rate outlook, the report said.
He is keeping his pared-back communication style
Since taking over as Fed chair in May, one of Warsh’s clearest policy shifts has been a sharp reduction in forward guidance to markets. His predecessors Jerome Powell, Janet Yellen and Ben Bernanke all worked to provide detailed economic projections and policy signals. Warsh has taken the opposite route.
Since leaving the Fed in 2011, Warsh has repeatedly criticized forward guidance in public, arguing that it trapped Fed chairs in their own words and led to excessive policy commitments.
He believes a leaner communication strategy would allow officials to read the market’s genuine assessment of economic conditions more clearly and reduce policy mistakes.
Warsh has said publicly that the real decision-makers in the bond market understand his approach, and that most criticism comes from people who do not carry investment responsibility and can only succeed when everything is carefully choreographed.
Eric Wallerstein, chief macro strategist at Clocktower Group and an adviser to former Fed governor Stephen Miran, said: “I don’t understand where the negative market sentiment toward Warsh is coming from.”
Markets price a 55% chance of a September hike
CME Group data show futures markets are assigning about a 55% probability to a 25-basis-point rate increase at the September meeting.
People familiar with the matter said that although Warsh has floated the possibility of shrinking the Fed’s $6.7 trillion balance sheet to tighten policy, interest rates remain the primary tool for now and would be used again at later meetings if needed.
The Fed’s preferred inflation gauge came in at 3.7% in June, extending a period of more than five years above the 2% target. Inflation swap data, a benchmark market measure of inflation expectations, show investors expect inflation to average about 2.4% over the five-year period beginning five years from now. That figure has eased in recent days, which those people said shows markets still believe the Fed is committed to restoring price stability.
Torsten Sløk, chief economist at Apollo Global Management, said Warsh was treated unfairly last week. “There is a growing consensus in the market that forward guidance is not a good idea because it leaves too little flexibility for central banks,” he said. Sløk also said Warsh could do more to explain his plan for bringing inflation down.
Jackson Hole may become a key moment
People familiar with the matter said any major overhaul of the monetary policymaking process will be delayed until at least next year. At that point, the working groups Warsh announced at his first press conference in June are expected to submit reports to the Federal Open Market Committee.
Warsh is expected to deliver his first speech at the Kansas City Fed’s Jackson Hole symposium later this month. The gathering is being watched as a chance for him to explain the theoretical framework behind what the report called his “silent revolution,” including clarifying the shortcomings he believes existed in his own earlier messaging.
Wallerstein said he expects the speech to show that Warsh intends to put his own stamp on the role. “Central banking has gone through a difficult period, with a lot of mistakes, including at the Fed itself. Warsh wants to confront that and try to put things back on course.”