“But as with other legacies of crises past, I believe the practice has outstayed its welcome. In normal times, the role of forward guidance should be limited and circumscribed; otherwise, it risks creating ambiguity in the name of clarity. Oversharing policy deliberations and overcommitting to future decisions can lead markets, businesses, and households astray, and I believe when policymakers make quasi-commitments on interest rates throughout the cycle, we inhibit our own freedom to make the right calls when it’s time to decide.”
His tone was firm: “We should not indulge a regime in which market participants are looking primarily to the Fed for their next trade.”
And while Warsh has repeated his commitment to the Fed’s dual mandate of inflation at 2% and maximum employment, neither he nor his central bank staffers are living under a rock: Bond yields tracked higher following Warsh’s July press conference, as markets digested a Fed on hold and the suggestion that markets may be doing some of the legwork for financial tightening that they had come to expect from the Fed.
But more alarmingly—for some corners of the street—were the questions hanging over the established frameworks the Fed uses to make decisions about the base rate. Analysts questioned if these frameworks might be subject to change, searching for answers on how policymakers were thinking, even if they didn’t know what action it might prompt.
