Warsh's quest for quiet Fed gets vocal pushback

By Ann Saphir and Howard Schneider

SAN FRANCISCO/WASHINGTON, Oct 15 (Reuters) - Federal Reserve Chairman Kevin Warsh’s ‌call for a “quieter” central bank is ​facing pushback from colleagues who ​see public communication as a fundamental part of their job and have taken to TV, podcasts, interviews, social media and speakers' podiums to make their policy views known.

Their voices have made a difference, with more than 40 appearances by nearly all of Warsh's colleagues at the central bank convincing traders to scale back rate-hike bets that had mounted after September's rate increase and Warsh's own silence on how much ‌more the Fed may need to do.

Data on Wednesday showed consumer prices rose 3.7% in September from a year earlier, shaking up financial markets' Fed expectations yet again. An October rate ⁠hike is now seen as a coin toss, an extraordinary lack of clarity that sharpens the focus on the stakes of Warsh's preference for silence.

Where the Warsh Fed's communications strategy will settle, however, remains an open question.

Warsh speaks in Bangkok on Friday at 0330 GMT (11:30 p.m. ET Thursday) at the International ‌Monetary Fund's annual meeting, a final chance to shape market expectations ‌for the Fed's decision in less than two weeks.

At every other opportunity, whether in talks to global central bankers in Sintra, Portugal, and Jackson Hole, Wyoming, or testimony before lawmakers, or answering questions from reporters at the Fed's headquarters, he has argued that the less Fed policymakers say about where they think rates should go, the more markets will be forced to take cues from economic data and make them a better source of information for the Fed ​as it makes its own rate decisions.

He has pared any hint of that so-called forward guidance from the Fed's post-meeting statement, and convened a task force widely expected to recommend jettisoning the rate-path projections produced quarterly that have been a staple of the Fed's communications for years.

Other policymakers, however, have been clear they will keep talking, in part because they think it is important for good monetary policy.

“If someone wants to present me with an argument that says, not ⁠speaking is going to help the public and households and businesses make better decisions and understand the economy, and it's going to help enhance our credibility as an institution, I'm all ears for it,” Cleveland Fed President Beth Hammack told Reuters in an interview on Monday. "I think it's a pretty hard argument to make."

'MARKETS ​TOOK NOTE'

Such a shift would mean upending decades of movement away from the cryptic style of Fed Chairman Alan Greenspan, which Warsh openly admires. Indeed, US economists Robert Hall and Michael Woodford, whose pioneering research helped steer the Fed and other central banks toward more frank communications about the monetary policy outlook, this week were awarded the 2026 Nobel Prize ​in economics.

Warsh's quiet Fed drive also comes as the Fed is trying to maintain and strengthen its accountability amid White House efforts to ‌influence its monetary policy decisions and challenge its independence.

Uncharacteristically pointed remarks from New York Fed President John Williams and Fed Vice Chair Philip Jefferson were particularly effective in resetting rate-hike expectations.

"Markets took note of the fact that you had two members of the troika giving a very consistent message," said Richard Clarida, global economic advisor at investment firm PIMCO. The New York Fed chief ⁠and the Fed vice chair along with the Fed chair are typically the three most influential policymakers.

A former Fed vice chair himself, Clarida said he saw his role back then as communicating the chair's thinking, though he said he could not speak for whether that was still true today. "We're in a regime -- in a world -- where it's important to listen to all of the members of the committee," he said.

Speaking in Turkey last week, Fed Governor Christopher Waller gave his own assessment of what will be needed: "additional rate hikes...(that) do not need to come at ⁠consecutive meetings, but they should be in place in an acceptable period of time."

Promising an exact rate path would keep the Fed from adjusting as needed to fresh information, Waller said, a risk Warsh has also raised.

But giving no signal at all, Waller said, "could surprise markets ​and create volatility," with investors pricing in a rate hike path that potentially exerts too little or far more restraint on the economy than what Fed policymakers see as necessary.

That appeared to have been the backdrop in recent weeks when Williams and Jefferson made the public case against rushing on rate hikes. Markets were expressing a strong conviction for a series of rate hikes at odds with the Fed's September dot plot that showed policymakers expected a less aggressive path.

VALUE OF COMMUNICATION

That may also have been the situation in August, when markets ‌bet heavily against a near-term rate hike after Warsh declined to offer a detailed rationale for July's decision to hold rates steady despite what he said was a "no tolerance" policy on inflation.

That time it was Warsh himself who broke the silence. Even as he repeated his call for a "quieter Fed," he said he wasn't convinced a recent cooling in inflation marked ‌a clear trend -- a signal to markets a rate hike was, indeed, coming.

"Transparency about how the central bank is attempting to achieve their objective is important," Charles Evans, a former Chicago Fed president who championed a very strong form of forward guidance to help bolster the economy in ⁠the wake of the 2007-2009 financial crisis, told economists in Cleveland earlier this week.

Juhi Dhawan, macro ‌strategist for Wellington Management, noted that remarks from Jefferson and Williams may ​have allowed Warsh to "get his message across without making himself be the conduit for it."

"I'm willing to give him some time to find that ideal form of communication," Dhawan said. "I think the value of communication has become apparent, if anything, in the last few months, as the Fed has tried to shift its trajectory on its rate path."

(Reporting by Ann Saphir and Howard Schneider; Editing by ‌Dan Burns and Andrea Ricci )

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Analysis-How the Houthis are helping Iran turn Saudi Arabia into a pressure point
• Ukraine passes key laws to help unlock billions in aid from EU, IMF
• US producer prices post largest increase in 4-1/2 years in September