Kevin Warsh’s first major speech as chairman of the Federal Reserve has become an unexpected trial of his slimmed-down communications style.
The challenge facing Warsh is to counter criticism that he hasn’t been forthright with his views on the economy, without capitulating on his determination not to spoon feed investors with clues on future policy moves.
The central bank’s annual gathering in Jackson Hole, Wyoming, where Warsh will speak Friday, is his opportunity to strike that balance.
The pressure from Wall Street is intense after a shaky press conference last month triggered a bond market rebuke. Economists and analysts have since been relentless in calling out Warsh for, in their view, going too far in a quest to limit Fed communications.
Warsh’s task was made even trickier last week when Treasury Secretary Scott Bessent announced surprise buybacks of US debt in an effort to lower long-term yields.
“Clearly Warsh wants to say less than more,” said Northern Trust Asset Management’s co-chief investment officer, Anwiti Bahuguna. “But some transparency and some communication on why you are where you are, what do you see today, is a reasonable question for markets to ask.”
That doesn’t mean the new chairman is likely to offer any apologies. Warsh’s defenders say the market reaction to his July press conference was overdone. Inflation expectations — which should climb if confidence in the Fed drops — moved only modestly and remain anchored at a level consistent with the central bank’s 2% target. Bond yields, they say, are being driven by surging government and corporate borrowing, among other factors.
See more: Bessent & Warsh Go Down the Jackson Hole
Randall Kroszner, an economics professor at the University of Chicago and a Fed governor from 2006 to 2009, argued that Warsh is only at the start of a communications overhaul that’s aimed at reining in explicit guidance on where policy is headed.
“Markets can sometimes get things wrong. I was at the Fed when the markets got a lot of things wrong,” Kroszner said. “There’s always going to be kind of a teething problem when there’s a new approach.”
Warsh’s Fed colleagues including San Francisco Fed chief Mary Daly and St. Louis Fed President Alberto Musalem have also pushed back against charges that the central bank’s credibility has been damaged.
“I don’t see our credibility at risk,” Daly said in an interview on Bloomberg Television.
Press Conference Wobble
It needn’t have been so contentious.
After taking office in May, Warsh won praise for hammering home a message that under his watch the Fed would return inflation to its 2% target. During testimony to lawmakers in July he said the central bank had no tolerance for inflation.
This eased worries that Warsh, who was appointed by President Donald Trump, would resist raising rates if conditions called for that. Trump had savaged Warsh’s predecessor and promised to name a new chair who would lower rates.
His first major wobble came right after the Fed’s July policy meeting when policymakers voted to leave the benchmark federal funds rate unchanged. While three officials dissented, the decision was expected and priced into bond markets. It was Warsh’s post-meeting press conference that triggered a broad rebuke from investors and economists.
Fed watchers say there were three pivotal aspects of the press conference. The first was the absence of an explanation as to why policy was held steady, and the second was Warsh’s unwillingness to present rate hikes as an obvious policy tool that might yet be needed. The third was a throwaway remark on the Fed’s 2% inflation target that led some to think it might be altered come January.
The end result was the bond market’s worst selloff in years and a torrent of criticism over Warsh’s communication style. The yield on 30-year Treasuries surged to its highest since 2007 after Warsh spoke.
“Warsh couldn’t, or wouldn’t, even explain the non-policy action in July, even when asked directly. That’s baffling,” said Robert Tetlow, a former senior policy adviser at the Fed. “It would have been easy for him to do without slipping into forward guidance.”
That selloff has continued in recent weeks. To be sure, it’s not all due to the Fed. Investors have grown increasingly concerned by rising US debt, and as Washington borrows more it’s competing for funds with technology companies pouring money into artificial intelligence. Moreover, rising yields for sovereign debt in Europe and Japan show investors’ concerns are wider than US inflation.
“There’s just a confluence of factors right now that are all more or less contributing to higher long-term yields,” said Adam Schickling, a senior economist at Vanguard Group Inc.
Bessent’s plan to buy back longer dated bonds in an effort to hold down yields is another potential complication for the Fed, especially if the planned purchases are financed through larger sales of shorter-dated debt. That would trespass into the sector of the Treasury curve the Fed traditionally dominates.
In a hint of relief for Warsh, data since the July policy decision has broadly pointed to a slowing in economic activity that may ease pressure on the Fed to raise interest rates. Retail sales fell in July by the most in more than a year while core inflation was subdued. At the same time employers unexpectedly cut jobs in July and hiring in the prior two months was revised lower.
Still, many agree Warsh will need to address his critics.
The Fed chairman will need to strike a balance between his desire to trim forward guidance without clouding transparency, said Ellen Meade, an economics professor at Duke University who advised Fed officials during a decades-long career at the board.
“Warsh is not doing himself a lot of favors,” she said. “He has painted himself into a box.”
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Read more articles by Enda Curran, Maria Eloisa Capurro
