Wyoming, Aug 28 (Reuters) – Federal Reserve Chairman Kevin Warsh’s disdain for signaling anything about the monetary policy outlook appeared to have tempered a bit on Friday in the face of a bond market clamoring for his thoughts on high inflation and what he might do about it
Warsh, in his debut speech to the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming, communicated just enough for financial markets to shift toward expecting an interest rate hike next month, in what observers saw as something of a welcome return to traditional Fed practice.
“Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” he told the audience of global central bankers. “Otherwise, we have work to do.”
It was a notable shift for a central bank leader who in the same remarks still asserted that “a quieter Fed, more purposeful in its communications, is better able to meet its objectives.”
“We do have a better sense now of how Chairman Warsh is seeing the economy, and that is very helpful and very constructive,” Nathan Sheets, global chief economist at Citigroup, said in a conference call after Warsh’s speech. In terms of how Warsh spoke on the economy, “having his diagnosis is a meaningful step forward compared to where we were coming out of the July press conference.”
Warsh changed gears amid debate over whether he would merely echo his performance during a July 29 press conference following the Fed’s decision to leave its policy rate unchanged in the 3.50%-3.75% range and remain mum on rates and how he deliberates on policy, or whether he’d start engaging in a way recent Fed chiefs have.
Warsh’s remarks only went so far, straddling both sides of those expectations and saying just enough for markets to take away a message that the odds of a rate hike at the September 15-16 policy meeting are now much higher.
He prefaced his remarks with a quip suggesting he would not break too far from his established pattern: “You can call it an outline … you can call it a trail map … just don’t call it forward guidance.”
For markets, what followed — a glimpse at his “reaction function” rather than a hard directional promise — offered enough of a signal to allow futures markets to reprice the Fed outlook, along with shifts in the bond market and stocks, to reflect the prospect of tighter monetary policy.
Robert Tetlow, a research economist and former top Fed staffer, said Warsh’s concern that providing rate guidance distorts market pricing is overdone. But he added, “it was very good for him to have gone through a rundown of how he sees the economy currently” and it was “good to hear that his assessment is quite conventional.”
