Regime Change Comes to the Federal Reserve
Kevin Warsh took the first steps this week on his quest to lead the Federal Reserve out of the dark ages .
The new chairman of the Federal Reserve has argued for over a decade that the Fed’s communications strategy, especially its tools for providing so-called forward guidance about monetary policy, needs rethinking. He’s argued that central bankers talk too much, that forward guidance has gone astray , and that the Fed’s preeminence in markets and the economy should be pared back.
In a talk to investors last year, Warsh put his advice for the Fed bluntly: “Stop talking so much. More thinking, less talking.”
Warsh Plots Against the Dots
At his first press conference as Fed chair, Warsh put that into practice. To the obvious frustration of the reporters gathered in the briefing room at the Fed headquarters, Warsh steadfastly refused to provide guidance about where the Fed’s policy might go next. He noted that he had declined to submit a forecast for the Fed’s Summary of Economic Projections, identifying himself as the missing dot from the so-called dot plot. The first policy statement of his Federal Open Market Committee (FOMC) was pared down to just the essentials, with no statement about Fed expectations for the economy or rates.
This is no small change. And Warsh made it clear that it is just the beginning. He hinted that he is likely to stop the practice of holding press conferences after every FOMC meeting, an innovation introduced by his predecessor and now colleague on the Fed board, Jerome Powell. Perhaps he will move back to the every-other-meeting schedule followed by Ben Bernanke and Janet Yellen. Or perhaps he’ll do away with the regularly scheduled press conferences altogether, gathering reporters only when necessary to announce some new policy.
“I had a great old mentor named George Shultz, and his mantra was press conferences are useful, but when you have one, you want to make sure you have something important to say,” Warsh told the gathered reporters.
He also hinted that the dot plot might not be long for this world . For the uninitiated, the dot plot is a chart in the Fed’s Summary of Economic Projections (SEP) that marks off with anonymous dots where the 19 official participants at FOMC meetings—the voting members plus the other regional Fed presidents—think interest rates will be at various points in the future. Indeed, it’s possible the entire SEP might be scrapped.
The Rise of Forward Guidance from the Ashes of the Financial Crisis
Not surprisingly, Warsh’s challenge to the status quo has provoked objections from journalists and analysts who have grown accustomed to the way things have been done for nearly two decades. “Does less talk at the Fed mean more noise for markets?” asked a headline in Reuters. The Wall Street Journal reported that “to several Fed watchers, he had stretched a defensible objection into something broader, discarding not just predictions about the next move but any account of how the committee will reason its way to a decision.”
Even before he assumed office, reporters were rushing to quietly criticize Warsh’s position. “Warsh signals that he would lead a less-transparent Federal Reserve,” a headline on Yahoo! Finance declared in April after Warsh had testified at his confirmation.
It’s worth taking a moment to reflect on why the Fed started talking so much and how forward guidance and its broader communication strategy became such a prominent feature of central banking. Before the 1990s, the Fed was deliberately opaque. Markets often had to infer FOMC decisions—whether the Fed was tightening or loosening policy—from open-market operations. That started changing in 1994, when the FOMC began issuing post-meeting statements. It wasn’t until 1999 that the Fed began including forward-looking language about the “tilt” or “bias” of policy.
When the financial crisis hit and the Fed’s policy rate went to zero , the Fed began to put into practice something that had been developed in theory by economists like Gauti Eggertsson and Michael Woodford and actually tried out by Japan’s central bank. Because it is assumed a central bank cannot effectively push its policy rate below zero, economists had worked out an idea of how to ease monetary policy and stimulate the economy through other means. And that idea was forward guidance.
The quick version of it goes like this. When the short rate is stuck at zero, the central bank can still stimulate demand by promising to keep rates lower in the future than it otherwise would. The Fed would commit to going beyond the usual monetary policy rules to keep its policy rates “lower for longer” in order to stimulate current demand.
In December 2008, the Fed cut the funds-rate target range to 0 to 0.25 percent and said weak conditions were likely to warrant exceptionally low rates “for some time . ” The minutes show the committee explicitly discussed how to talk to the public and mark…
Read the full article at Breitbart News →📄Source document: Federal Reserve→52 reports
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Official sources cited
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Official sources cited
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