Thank you for a clear analysis. Lack of information on which "tools he uses" surely does create excessive uncertainty for anyone making plans. Like the uncertainty created by Trump's tariff policy (if there is one), the lack of information on the tools, NOT on anticipated decisions, makes planning current and future expenditures more risky than it needs to be.
“The SEP is a thought experiment, not a commitment”
I share your view, but market participants have a different view, apparently. About the only thing I share with Warsh is his antipathy toward that different view (my own view may be better described as puzzlement - How could anyone think that averaging ‘the dots’ of a dozen or so independent projections would yield a sound basis for any sort of decision?). As a result his non-participation in the experiment is the least of my concerns.
One prominent feature of the presser you didn’t touch on was the line of questioning regarding Warsh’s contact/relationship with HRH DJT. Warsh swatted those questions away like flies at a picnic. Reporting after the fact indicates that there has been recent contact and Warsh has positioned himself as defender of the faith against the infidel members of the committee (or “board”, as HRH calls it). This is quite an accomplishment if one believes Neil Dutta, who said that Warsh is always most comfortable being hawkish and that that was entirely consistent with Warsh’s presser performance.
Many political appointees have been accused of testifying or responding to questions for an audience of one. One must stretch one’s imagination to the breaking point to imagine that the Fed chair could adopt such a strategy completely. Nonetheless, one can imagine that - in order to avoid breaking the presidential spell - Warsh tailored his comments with one person inordinately in mind. The growth, growth, growth mantra would play particularly well with that single individual. The emphasis on the less fortunate would play well with that individual’s advisors, who haven’t been able to keep their boss on script with the affordability campaign theme.
Another point - you seem to think the pressers will continue into the indefinite future. You certainly are more knowledgeable than I, but my understanding is that the unit of measure for Warsh’s commitment to the presser is “months” and the matter has been referred to the communications committee/task force (the correct vocabulary escapes me). I expect a recommendation to maintain the press conference but I would be unsurprised if Warsh made an executive decision and overruled the recommendation.
Thanks, lots here. On the dots: I'd push back a little. Nobody decides off the median; it's a survey of 18 reaction functions, and what mattered last week was the distribution, not the average. Twelve of eighteen on the same dot for this year; for next year, fourteen of eighteen at or above that level, eight of them a notch higher. That told markets where the committee's ceiling was, and it held until the Chair said the projections weren't his. That's the use of the exercise, and it's why his non-participation isn't nothing.
On the audience of one: I left it out deliberately. The growth-first framing shows up in Warsh's 2010 FOMC remarks and in years of writing before the nomination, so it doesn't need a presidential explanation, and I'd rather hold him to his words than guess at his motives. The disclosure question is real, and I've written about it separately.
On the pressers, agreed; their future is uncertain. The post is about what they should do while they exist.
“ and it's why his non-participation isn't nothing.”
Point well taken.
About leaving out the audience of one… I understand why one might want to leave it out of the discussion, no window into another’s mind, and all that. But doing so seems to leave out a relevant force, potentially akin to the Church of Rome ignoring Galileo’s work on planetary orbits. This is an imperfect metaphor obviously, with Lisa Cook being cast as heretic the force being ignored rather than Galileo being cast as heretic as the means to repression. But we have seen AI images of His Holiness Donald the First, so maybe it fits better than I originally thought.
Perhaps the press conference was really a message to one person. "Mr. Trump, Yes I did have to raise rates but the reason is because the growth of YOUR economy is so star spangled awesome that I had to. And I am going to keep it that way, because, as Fed chair, I am first and foremost committed to a growing economy so you can use that line about how a growing and growingly unequal (K-shaped) economy still lifts all boats and helps the middle class.
Furthermore, there will continue to be obfuscation so that when he is forced to lower rates to satisfy Trump, he can avoid questions as to why, when the reality does not support a rate cut.
Many other Fed officials revised up their growth forecasts in the SEP, so the growth message didn't come only from Warsh. We won't know until the FOMC minutes how they characterized it. I find Warsh's answers at odds with standard practice, but I take him at his word, mainly because he's been consistent over more than twenty years in talking about growth.
Agreed, and I said as much; Powell spent years on the imprecision. My question isn't whether neutral is measurable. It's what Warsh uses instead. If the answer is judgment, the public still deserves to know what the judgment weighs.
My ultimate disappointment with economics is the overemphasis of quant. R* is quant problem. We have a qual problem. On a risk management basis a hike was probably correct. The fomc would be smart to take this slow though. Their tools mostly affect the demand side and inflation is staying a bit elevated due to geopolitics and supply shocks..tariffs, Russia/Ukraine and Iran wars...throw in a large and unstable ai investment surge. Most of these are not amenable to monetary policy adjustments. I can easily see a 3% 10 year and an ugly yield curve inversion when/if these factors unwind. Then you are talking about rapid short term interest rate cuts being necessary....
Greenspan held the rate at 3% in the 90's with a somewhat tight fiscal policy and low unemployment. Kind of a real world test of a neutral rate, at least for conditions at the time.
Warsh has one standard tool; it's a phone call made the previous day. That's it. An 11-1 vote would've been embarrassing, even for this administration. Not hard to picture the rate damage that would have produced?
New Fed Chair Kevin Warsh said at the most recent FOMC meeting that the Fed would do what it takes to restore confidence in the Federal Reserve to fulfill its mandate of low inflation with maximum employment.
Does the new Fed chairman want to be another Paul Volcker, whose Board of Governors raised the Fed Funds rate to 20 percent to cure the stagflation surge of the 1970s? We don’t need another ‘hard landing’, the economic term for an engineered recession.
This analysis raises fair questions about the Fed Chair's coherence, but it takes for granted some significant misconceptions about how government finance and monetary policy actually work. First, the central bank sets its own interest rate, bond markets update their expectations about future central bank decisions. They don't independently discipline the government on borrowing costs, yes? Second, you correctly identify Middle East conflict and tariffs as the real sources of inflationary pressure; that makes rate hikes the wrong tool. They suppress demand without fixing the supply problem, and can worsen inflation by raising construction and business borrowing costs. Third, the 2% inflation target is a policy choice, not a law of nature, the real question is whether the cure (unemployment risk, higher rents, wealth redistribution to creditors) is proportionate to the problem. Good monetary analysis requires asking whether the interest rate tool is matched to the actual inflation source, and here, the evidence suggests it isn't.
That rate hike was worthwhile, if only for the entertainment value watching Trumpkopf go apoplectic.
"...sustaining the economic progress happening in America right now..." This statement seems to be targeting an audience of one. No need to even name who it is.
"But now that the Fed has hiked, how will he judge whether to hike again, and when to stop?" Especially since he's already signaled that PCE isn't his preferred measure.
"Markets over time will come to understand how this Fed makes its decisions..." That's one way to slow growth.
"...and how he squares a shorter, narrower format with the Fed’s accountability". Perfectly in keeping with the regime's view of accountability.
"...as Fed Chair, it is causing unnecessary confusion". Also in keeping with the regime's policies.
Three of 12 favored a hike six weeks ago. Twelve of 12 favored it last week. Either nine people re-read the data in six weeks, or the vote is not where the disagreement lives. Unanimity is an output, not a measurement. The distribution surfaces at the press conference instead, which is why your five questions are about the explanation and not the decision.
Partly. Fed votes are consensus products and unanimity is negotiated; I've noted the one sentence of rationale twelve people could sign. But the July holders said they were buying time for data, and the data came. Nobody had to change their model to vote yes in September. The disagreement did surface, in the dots: eight at 4.375 versus six at 4.125 for next year. The presser is where the Chair's view diverged from that distribution, which is a different gap than the one inside the committee. The minutes will show how much of each.
With Treasury expanding long-duration buybacks while the Fed rolls over Treasuries and redirects MBS runoff into bills, are monetary policy and debt management becoming increasingly intertwined? At what point would you consider that financial repression rather than market plumbing?
Good question. My test is the real rate, not the composition. Treasury buying back long bonds and the Fed rolling runoff into bills change who holds duration; they don't hold the real rate below where the market would set it. Last week is the evidence: 12-0 hike into White House objections, ten-year above 5 percent. That's not a Fed working for the Treasury's interest bill. Where it would become repression: the Fed absorbing duration when the long end sells off, buybacks timed to cap yields, or rules that force banks and stablecoins to hold Treasuries at yields they wouldn't choose. Watch the reason given for a balance-sheet move, not the move itself.
the warsh gap is the real story... markets pricing hikes off his rhetoric while the sep centers on one more. if the long end keeps doing the tightening, the committee's path matters less than the chair's tone
The follow-through is worth putting on the record. The 10-year went from 4.998% the Friday after the meeting to 5.184% a week later, and CNBC had Thursday's level as the highest since June 2007. But that second leg also came with Barr's "further policy adjustments" speech, the highest flash Purchasing Managers' Index (PMI) reading in more than four years, sticky oil, and a global selloff in gilts, bunds and Japanese government bonds. How would you split it: how much of the post-meeting rise is Warsh-specific confusion, and how much is term premium that would have shown up under any Chair?
All good points. I worry that his cagey behavior is the desire to appeal to certain authorities which concerns me about what may happen if we encounter bigger issues.
Separately, given how yields have moved recently, I actually wonder if the Fed shouldn't have gone higher with a 50bp move. That would boost credibility, although likelier to do more damage. At the same time, if you're going to hike again (and looks like they have no choice), why not double hike now?
I wonder if part of the answer is on the balance sheet side. Warsh has suggested that a smaller balance sheet would leave room for a lower funds rate, so he may be judging the two together. Did it come up at all in the presser?
Thank you for a clear analysis. Lack of information on which "tools he uses" surely does create excessive uncertainty for anyone making plans. Like the uncertainty created by Trump's tariff policy (if there is one), the lack of information on the tools, NOT on anticipated decisions, makes planning current and future expenditures more risky than it needs to be.
Thank you once again Claudia. Excellent work again!
“The SEP is a thought experiment, not a commitment”
I share your view, but market participants have a different view, apparently. About the only thing I share with Warsh is his antipathy toward that different view (my own view may be better described as puzzlement - How could anyone think that averaging ‘the dots’ of a dozen or so independent projections would yield a sound basis for any sort of decision?). As a result his non-participation in the experiment is the least of my concerns.
One prominent feature of the presser you didn’t touch on was the line of questioning regarding Warsh’s contact/relationship with HRH DJT. Warsh swatted those questions away like flies at a picnic. Reporting after the fact indicates that there has been recent contact and Warsh has positioned himself as defender of the faith against the infidel members of the committee (or “board”, as HRH calls it). This is quite an accomplishment if one believes Neil Dutta, who said that Warsh is always most comfortable being hawkish and that that was entirely consistent with Warsh’s presser performance.
Many political appointees have been accused of testifying or responding to questions for an audience of one. One must stretch one’s imagination to the breaking point to imagine that the Fed chair could adopt such a strategy completely. Nonetheless, one can imagine that - in order to avoid breaking the presidential spell - Warsh tailored his comments with one person inordinately in mind. The growth, growth, growth mantra would play particularly well with that single individual. The emphasis on the less fortunate would play well with that individual’s advisors, who haven’t been able to keep their boss on script with the affordability campaign theme.
Another point - you seem to think the pressers will continue into the indefinite future. You certainly are more knowledgeable than I, but my understanding is that the unit of measure for Warsh’s commitment to the presser is “months” and the matter has been referred to the communications committee/task force (the correct vocabulary escapes me). I expect a recommendation to maintain the press conference but I would be unsurprised if Warsh made an executive decision and overruled the recommendation.
Thanks, lots here. On the dots: I'd push back a little. Nobody decides off the median; it's a survey of 18 reaction functions, and what mattered last week was the distribution, not the average. Twelve of eighteen on the same dot for this year; for next year, fourteen of eighteen at or above that level, eight of them a notch higher. That told markets where the committee's ceiling was, and it held until the Chair said the projections weren't his. That's the use of the exercise, and it's why his non-participation isn't nothing.
On the audience of one: I left it out deliberately. The growth-first framing shows up in Warsh's 2010 FOMC remarks and in years of writing before the nomination, so it doesn't need a presidential explanation, and I'd rather hold him to his words than guess at his motives. The disclosure question is real, and I've written about it separately.
On the pressers, agreed; their future is uncertain. The post is about what they should do while they exist.
“ and it's why his non-participation isn't nothing.”
Point well taken.
About leaving out the audience of one… I understand why one might want to leave it out of the discussion, no window into another’s mind, and all that. But doing so seems to leave out a relevant force, potentially akin to the Church of Rome ignoring Galileo’s work on planetary orbits. This is an imperfect metaphor obviously, with Lisa Cook being cast as heretic the force being ignored rather than Galileo being cast as heretic as the means to repression. But we have seen AI images of His Holiness Donald the First, so maybe it fits better than I originally thought.
His Orange MAGA Majesty nominated Warsh for a reason - and it wasn't merely because he looks straight out of central casting.
Perhaps the press conference was really a message to one person. "Mr. Trump, Yes I did have to raise rates but the reason is because the growth of YOUR economy is so star spangled awesome that I had to. And I am going to keep it that way, because, as Fed chair, I am first and foremost committed to a growing economy so you can use that line about how a growing and growingly unequal (K-shaped) economy still lifts all boats and helps the middle class.
Furthermore, there will continue to be obfuscation so that when he is forced to lower rates to satisfy Trump, he can avoid questions as to why, when the reality does not support a rate cut.
Many other Fed officials revised up their growth forecasts in the SEP, so the growth message didn't come only from Warsh. We won't know until the FOMC minutes how they characterized it. I find Warsh's answers at odds with standard practice, but I take him at his word, mainly because he's been consistent over more than twenty years in talking about growth.
Ah, but there's a catch. He can't lower rates by himself. Especially if the rest of the board disagrees with it.
The neutral rate is hard to measure and tends to be unstable over time- even in the short term
Agreed, and I said as much; Powell spent years on the imprecision. My question isn't whether neutral is measurable. It's what Warsh uses instead. If the answer is judgment, the public still deserves to know what the judgment weighs.
My ultimate disappointment with economics is the overemphasis of quant. R* is quant problem. We have a qual problem. On a risk management basis a hike was probably correct. The fomc would be smart to take this slow though. Their tools mostly affect the demand side and inflation is staying a bit elevated due to geopolitics and supply shocks..tariffs, Russia/Ukraine and Iran wars...throw in a large and unstable ai investment surge. Most of these are not amenable to monetary policy adjustments. I can easily see a 3% 10 year and an ugly yield curve inversion when/if these factors unwind. Then you are talking about rapid short term interest rate cuts being necessary....
Greenspan held the rate at 3% in the 90's with a somewhat tight fiscal policy and low unemployment. Kind of a real world test of a neutral rate, at least for conditions at the time.
Warsh has one standard tool; it's a phone call made the previous day. That's it. An 11-1 vote would've been embarrassing, even for this administration. Not hard to picture the rate damage that would have produced?
New Fed Chair Kevin Warsh said at the most recent FOMC meeting that the Fed would do what it takes to restore confidence in the Federal Reserve to fulfill its mandate of low inflation with maximum employment.
Does the new Fed chairman want to be another Paul Volcker, whose Board of Governors raised the Fed Funds rate to 20 percent to cure the stagflation surge of the 1970s? We don’t need another ‘hard landing’, the economic term for an engineered recession.
This analysis raises fair questions about the Fed Chair's coherence, but it takes for granted some significant misconceptions about how government finance and monetary policy actually work. First, the central bank sets its own interest rate, bond markets update their expectations about future central bank decisions. They don't independently discipline the government on borrowing costs, yes? Second, you correctly identify Middle East conflict and tariffs as the real sources of inflationary pressure; that makes rate hikes the wrong tool. They suppress demand without fixing the supply problem, and can worsen inflation by raising construction and business borrowing costs. Third, the 2% inflation target is a policy choice, not a law of nature, the real question is whether the cure (unemployment risk, higher rents, wealth redistribution to creditors) is proportionate to the problem. Good monetary analysis requires asking whether the interest rate tool is matched to the actual inflation source, and here, the evidence suggests it isn't.
That rate hike was worthwhile, if only for the entertainment value watching Trumpkopf go apoplectic.
"...sustaining the economic progress happening in America right now..." This statement seems to be targeting an audience of one. No need to even name who it is.
"But now that the Fed has hiked, how will he judge whether to hike again, and when to stop?" Especially since he's already signaled that PCE isn't his preferred measure.
"Markets over time will come to understand how this Fed makes its decisions..." That's one way to slow growth.
"...and how he squares a shorter, narrower format with the Fed’s accountability". Perfectly in keeping with the regime's view of accountability.
"...as Fed Chair, it is causing unnecessary confusion". Also in keeping with the regime's policies.
One correction: he settled the target at Jackson Hole, 2 percent PCE, and I gave him credit for it. The open question is the path, not the measure.
Ah, I didn't realize that.
Three of 12 favored a hike six weeks ago. Twelve of 12 favored it last week. Either nine people re-read the data in six weeks, or the vote is not where the disagreement lives. Unanimity is an output, not a measurement. The distribution surfaces at the press conference instead, which is why your five questions are about the explanation and not the decision.
Partly. Fed votes are consensus products and unanimity is negotiated; I've noted the one sentence of rationale twelve people could sign. But the July holders said they were buying time for data, and the data came. Nobody had to change their model to vote yes in September. The disagreement did surface, in the dots: eight at 4.375 versus six at 4.125 for next year. The presser is where the Chair's view diverged from that distribution, which is a different gap than the one inside the committee. The minutes will show how much of each.
With Treasury expanding long-duration buybacks while the Fed rolls over Treasuries and redirects MBS runoff into bills, are monetary policy and debt management becoming increasingly intertwined? At what point would you consider that financial repression rather than market plumbing?
Good question. My test is the real rate, not the composition. Treasury buying back long bonds and the Fed rolling runoff into bills change who holds duration; they don't hold the real rate below where the market would set it. Last week is the evidence: 12-0 hike into White House objections, ten-year above 5 percent. That's not a Fed working for the Treasury's interest bill. Where it would become repression: the Fed absorbing duration when the long end sells off, buybacks timed to cap yields, or rules that force banks and stablecoins to hold Treasuries at yields they wouldn't choose. Watch the reason given for a balance-sheet move, not the move itself.
the warsh gap is the real story... markets pricing hikes off his rhetoric while the sep centers on one more. if the long end keeps doing the tightening, the committee's path matters less than the chair's tone
Own cash-flow names while sticky rates still test the Chair.
https://paretoinvestor.substack.com/p/gold-real-yields-correlation-broken-debasement-regime-2026
The follow-through is worth putting on the record. The 10-year went from 4.998% the Friday after the meeting to 5.184% a week later, and CNBC had Thursday's level as the highest since June 2007. But that second leg also came with Barr's "further policy adjustments" speech, the highest flash Purchasing Managers' Index (PMI) reading in more than four years, sticky oil, and a global selloff in gilts, bunds and Japanese government bonds. How would you split it: how much of the post-meeting rise is Warsh-specific confusion, and how much is term premium that would have shown up under any Chair?
All good points. I worry that his cagey behavior is the desire to appeal to certain authorities which concerns me about what may happen if we encounter bigger issues.
Separately, given how yields have moved recently, I actually wonder if the Fed shouldn't have gone higher with a 50bp move. That would boost credibility, although likelier to do more damage. At the same time, if you're going to hike again (and looks like they have no choice), why not double hike now?
I wonder if part of the answer is on the balance sheet side. Warsh has suggested that a smaller balance sheet would leave room for a lower funds rate, so he may be judging the two together. Did it come up at all in the presser?