New chief Kevin Warsh says forward guidance dropped at Federal Reserve

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New Federal Reserve Chair Kevin Warsh said Wednesday the central bank will move away from forecasting its future action under his leadership.

In announcing its decision to hold interest rates steady, the Federal Open Market Committee (FOMC) opted not to include forward guidance. The panel typically provides information about the “likely future course of monetary policy.”

“We’ve dropped forward guidance,” Warsh said at a Wednesday press conference. “Some along the committee, I think, dropped it, I suspect from our discussion the last couple of days, because they said at this moment in time it doesn’t feel as though providing forward guidance is right.”

“Others have, I’d say, different views, and think as a general proposition forward guidance isn’t the business we should be in,” he continued.

“We’re going to listen hard to what the experts say and make our own decision, but I can’t give any forward guidance about what we’re going to do next,” he added.

Earlier Wednesday, the FOMC voted unanimously to maintain the federal funds rate at a range of 3.5 percent to 3.75 percent. The vote marked the fourth straight time the panel has held rates steady.

In the committee’s quarterly Summary of Economic Projections, nine FOMC officials projected at least one rate hike this year. Eight officials said rates will remain steady, while one predicted a singular rate cut.

Warsh, though, was the sole member not to provide a projection, known as a “dot” for the projections plot. He said offering a projection would not be “helpful in the conduct of policy.”

“This Dot Plot carries less weight than previous ones, since Warsh stated in the post-decision press conference that he did not submit forecasts for it,” Bill Adams, chief U.S. economist for Fifth Third Commercial Bank, said in a statement.

“This is another sign that he wants to steer the Fed away from all types of forward guidance, including the Dot Plot,” Adams added.

The new chair’s remarks are not a surprise, given he outlined his preference for the Fed to abstain from releasing future guidance during an April nomination hearing.

“The Fed tells the whole world what their dots are going to be, what their forecasts are going to be,” he told the Senate Banking Committee. Warsh specifically criticized the Fed for issuing projections in 2021 and 2022, which he said “compounded” the policy errors it made as inflation spiked.

“I think if the Fed were to wait until it gets into a meeting before making a decision, that incremental deliberation can keep the central bank from compounding its errors,” he added at the time.

Warsh noted Wednesday he plans to conduct a review by year’s end about “communications broadly,” including on the number of press conferences he holds and the Fed’s economic projections, meetings, transcripts and minutes.

He also said he will appoint a task force to review the Fed’s communication policies — one of five such task forces, ranging in focus from the central bank’s balance sheet to productivity in a rapidly evolving economy.

“I don’t want to prejudge the outcomes there, but I’m pretty open-minded about what they could be,” he added, referring to the results of his review.

The central bank’s website says individuals and businesses use forward guidance “in making decisions about spending and investments.” In that vein, forward guidance “can influence financial and economic conditions” in the present, the Fed notes.

But Warsh argued tweaking Fed policy on forward guidance will help markets, and the central bank itself, operate more efficiently.

“When all the financial markets are doing is reflecting back what we’ve said, then we’re taking the most important source of information and we’re being blind to it,” he said.

“I’d like us to create a system where those blinders come off, where markets are following data that they efficiently think is reliable, and they’ll be watching data, we’ll be watching data, they’ll come with better information through market prices to us.”

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