The term of the taciturn Fed Chair

The new Fed Chair Kevin Warsh is setting up task forces to review the central bank’s current strategies.

When Kevin Warsh was recently confirmed as the Chairman of the Federal Reserve, there was a group of market enthusiasts quite sceptical about the change, worried about how it could upset the independence of this institution. I was in that camp, I must admit.

But a few weeks into his chairmanship, and quite commendably, just a few minutes into his first press conference, Warsh seems to have quelled those fears, and (to his credit) stoked fascination into a disruptive strategy he believes will bolster the central bank’s credibility.

The Fed has a dual mandate — to maintain stable prices and to ensure maximum employment. But for years, it has been manipulated into believing in the consequence of a third, rather abstract mandate of “forward guiding” the markets. The efficacy of forward guidance, especially in periods where the lower bound of the Fed’s target range is not zero, is a fiercely challenged topic in itself. As Warsh recently put it, financial markets should be reacting to incoming data. Reacting to how the Fed would react to data is not, in the least, optimal.

That is not to say, the practice of forward guidance must be shunned as categorically pointless. History is scattered with examples of how central banks, labouring under ambiguous economic headwinds, have served as much-needed anchors for markets fumbling their way through the dark. But how much is too much? And to what extent do these signals (read dots) penciled in by the Fed members obligate them to follow through with their actions? Or, in dire situations, allow them the space to be intellectually humble enough to swallow their own words?

It is telling, that of the five task forces newly forged by Warsh, the first is to review the Fed’s communications. And it is also telling, that the Chair stood his ground during the meet, giving curt responses to questions he did not want to answer, and obstinately deflecting some to the remit of “the task forces”, a phrase I am fairly certain he mentioned more than he mentioned “inflationary pressures”.

In a world insatiably hungry for more information, and incessantly scanning for frequent updates, the power of less is unparalleled. Will Warsh be able to wield this power with tact, without unnerving markets? Will he be able to guide his colleagues towards achieving a goal that they have failed to reach in recent years, without attracting too many unsolicited rants from the White House? Only time will tell.

It could be months or even years before there’s any tangible measure of success to this one-of-a-kind experiment.

Interesting times ahead in central banking? For sure! Inflection points ahead in sticky, stubborn inflation? We’ll see.

Nilofer

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Originally published at https://www.linkedin.com.