For Warsh as Fed chair, silence may be the point

Markets head into the first Fed meeting run by new Chair Kevin Warsh with almost no idea what he thinks about the recent surge in job growth, the acceleration in inflation or the path of interest rates.

And that may be by design.

Warsh has strongly criticized Fed communications, saying they have led to policy errors and placed the Fed more at the center of market decisions and the economy than it should be. His plans for "regime change" include a rethink of how the Fed forecasts and talks about its plans for monetary policy. That appears to include both quantity and frequency.

"If you ask me my true personal opinion right now, Fed chairs and other central bankers around the FOMC, they speak quite frequently," Warsh said at his confirmation hearing in April, referring to the Federal Open Market Committee. "I would say this, I think truth-seeking is more important than repetition. If one has a press conference, one wants to deliver some important news."

The immediate short-run question is where Warsh stands on the issue of removing a signal in the Fed's policy statement to markets that the central bank hopes to keep cutting rates. The "easing bias" is part of the FOMC statement that signals additional rate cuts. Three FOMC members dissented in the last meeting, signaling they wanted the Fed to stop leaning toward cuts.

And so-called Fed speak, in which every word is parsed by markets, may become even more subtle.

JP Morgan Chief Economist Michael Feroli doesn't think Warsh will say he's "open" to rate hikes, "but I could see him saying he can't rule it out."

Removing the easing bias would dovetail with Warsh's longer-term desires for the Fed to reduce how much it telegraphs its next move.

In 2014, after he'd left an earlier term as a Fed governor, Warsh led an internal review of the Bank of England's communications strategy and generally argued for greater transparency but less communication overall. He called the BOE's monthly meeting schedule "sub-optimal" and recommended reducing their annual number from 12 to eight.

"Outside of crisis periods, the economic landscape tends to change rather slowly. It is rare indeed that the economy changes so rapidly that adjustments to monetary policy are needed at four-week intervals,'' Warsh wrote in the report.

Just last year, Warsh echoed those ideas in a speech at the Hoover Institute, saying, "Fed leaders would be well-served to skip opportunities to share their latest musings…The swivel chair problem, rhetorically waxing and waning with the latest data release, is common and counter-productive."

The Fed has already announced that Warsh will hold a press conference after the meeting next week, suggesting at least initial adherence to immediate past Fed Chair Jerome Powell's practices. But, in his Senate testimony, he wouldn't commit to holding them after every meeting. That has led to speculation he could go back to holding them four times a year, the same frequency before Powell upped them to every meeting.

But there are potential costs, including greater volatility in markets and a loss of power for the Fed chair.

"It's not really a good idea for the Fed to surprise the markets [or] to go backwards in terms of communications,'' former Cleveland Fed President Loretta Mester said. "But that's not saying it can't be improved."

Former Fed Vice Chair Richard Clarida warned shortly after Warsh's nomination in January that "the transition to a new communication regime may be bumpy."

Rather than the Fed chair corralling members of the FOMC toward a decision before the meeting, Warsh optimally wants the Fed to decide policy through robust debate around the table. He believes this will lead to better decisions and better meetings.

The problem for Warsh is that he has little ability to control the public speeches and interviews given by his colleagues. The 12 regional Fed bank presidents have an independent right to speak and often avail themselves of it before and after the meetings.

"You can't move to a world where nobody talks," Clarida told CNBC. "People will talk. It makes sense not to give up the bully pulpit."

That's also an argument to to continue holding press conference at every meeting.

"The press conference is the chair's best friend," Feroli said. "It allows the chair to be the first one right out of the gate to set the narrative about what happened at the meeting and what does the committee now think."

For Warsh, the upside of providing less guidance about where the Fed is going would be a better signal from markets about where the Fed should go, less influenced by Fed speak.

In 2004, former Fed Chair Ben Bernanke, then a governor, coined the phrase "the hall of mirrors problem …in which the policymaker is at once sending signals to the market about future policy and trying to gain insights from the market."

Warsh believes Fed communications pollutes that signal by oversteering markets towards an expectation that Fed officials feel an obligation to fulfill, even if it's the wrong policy.

He has a similar critique of the **"**dot plot," where officials anonymously write down their forecasts for the Fed funds rate. He believes this hobbled the Fed from acting quickly to contain the inflation from the covid pandemic.

"The Fed tells the whole world what their dots are going to be, what their forecasts are going to be," Warsh said in his April Senate testimony. "Well, the Fed is human, then they hold on to those forecasts longer than they should. 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."

Several ideas for fixing the "dot-plot" problem have been discussed inside the Fed, according to former St. Louis Fed President James Bullard. They include releasing the forecasts sometime after the meeting, to keep the market's attention on the statement. Another idea is to just publish the staff forecast, which the staff itself has resisted because of concern it could become the subject of political scrutiny.

The forecast document is one that is decided by the full FOMC, meaning Warsh can't make changes unilaterally. That underscores the general expectation that the new Fed chair may be planning profound changes to Fed communication strategy, but they are likely to happen only gradually.