That may or may not be a good idea to respond to markets rather than influence. But the congressional mandate remains respond to employment and inflation. There is no approved market movement inputs.
He might have tried a soft communication transition step-down from Powell to establish a minimal independence but we must now assume the worst about Warsh's transparency problem. Does he even have a stance beyond what his appointer will demand?
Congress gave the Federal Reserve a clear dual mandate—price stability and maximum employment—not a mandate to manage market vibes or to mute itself for political convenience. When a Chair retreats from communication, markets don’t become calmer; they simply fill the vacuum with noise, speculation, and self‑reinforcing narratives. That’s not monetary policy—it’s drift.
The Fed’s real strength is the quiet, disciplined use of macroeconomic tools that no other institution in the country possesses: the ability to read the full banking system in real time, to anchor expectations, and to act with enough independence to take the long view when elected officials cannot. That independence is the guardrail that has kept the U.S. economy from veering into the ditch more than once.
We’ve seen what happens globally when central banks become extensions of political will: inflation expectations unmoor, fiscal dominance takes over, and credibility evaporates. The United States avoided that fate because the Fed has historically been willing to speak clearly, act transparently, and own its decisions.
If the next Chair chooses silence over stewardship, or political alignment over institutional duty, the cost won’t be measured in headlines. It will be measured in lost jobs, higher borrowing costs, and diminished trust in one of the few remaining institutions capable of stabilizing the economy. The mandate hasn’t changed. The responsibility hasn’t changed. The Fed must remain independent, data‑driven, and willing to use its full macroeconomic power to meet the obligations the country has placed on it.
"If the next Chair chooses silence over stewardship, or political alignment over institutional duty, the cost won’t be measured in headlines. It will be measured in lost jobs, higher borrowing costs, and diminished trust in one of the few remaining institutions capable of stabilizing the economy". That's the plan! It's all laid out in Project 2025.
A thing I think about: will Warsh be resolutely silent when/if he has relatively "better" news to share, e.g., inflation down, employment up, both settling in the ranges the Fed historically prefers? To me, that will be a useful sign of whether he's a serious Fed Chairman or just another result-oriented Trumpian hack.
Post Trump perhaps some degree of Fed Clarity may return. Until then I perceive a choppy price world until tariffs and wars are not influencing the micro and macro environments.
Warsh is either confused or letting in confusion when he does not distinguish
a) guessing about future movements of policy instruments, appropriate and long over due, (decisions are supposed to be data driven, not subject to quasi-promises)
from
b) explaining the reasoning of the FMOC in the decision it took and predicting the results of that decision for inflation, unemployment, etc.
Perhaps he was only signaling independence or grandstanding, but "price stability" is a violation of the Fed's mandate. Taken literally, It is grounds for impeachment.
Mr Warsh has a rare situation that he faces with his predecessor: any non-downward forward guidance he might offer will generate a significant and potentially dangerous political reaction. While he might survive a political showdown, he might not, and the consequences of losing would, be, IMHO, umm-undesirable. He may think that the course of wisdom would be to fly below the radar, and issue unpopular guidance only when the objective conditions strongly support the action and he has the board behind him. (Mr Warsh's actual views remain unknown, at least to me).
In light of the current inflation being unnaturally instigated, Would raising rates really be appropriate? Would raising rates even work?
Lack of accountability is the hallmark of the Trumpkopf regime, and Warsh being Trumpkopf's pick for Fed Chair effectively makes him a member of the regime. As is the case for everything else with the King's Klown Kar, we're heading into rough seas.
I think you underplay the benefits of less communication from the Fed, the reality that traders must now think for themselves as to the value of a trade and position taking into account they may be wrong. excessive leverage for an arbitrage trade with the Fed telling you rates would be lower for longer was the norm. if a trader isn't sure, position sizing will shrink and systemic risk will be reduced.
personally, I think this is a much better solution. when Paul Volcker was Fed chair, there were essentially zero people who could name anyone else on the committee, and as he rarely spoke, markets had to make decisions on their own, as it happens, positioning was much smaller because of that and systemic risks reduced.
But the Fed forward guidance should be just that. Even if they lowered rates and commented that they expected to lower rates in the future, it was conditioned on the major economic trends continuing.
The research indicates that guidance increases the impact of Fed policy, which is to say that, for example, if the Fed believes the economy needs stimulus, an interest rate move plus guidance is better than just the interest rate change on its own.
The only question is whether the Fed sees guidance as a commitment, and refuses to change rates if circumstances indicate the previous action was inadequate or wrong.
Perhaps they need more clarity in the statements to make it clear that the guidance is based on current conditions.
Given the importance of the rate on long term economic planing, forcing the public to play "connect the dots" is a strange decision.
As for traders doing arbitrage on the rates - I don't really care. The real point is providing planning insight on the cost of debt for organizations actually building the economy.
I disagree, allowing traders to overload a position assuming they have the Fed at their back is what created the instabilities that led to the Tech bubble and then the GFC. that combined with additional regulation reining in banks utilization of their balance sheets has resulted in non bank financing with limited oversight, like the current private credit situation, and opened the door for significant market dislocations, which lead to economic ones.
Wall Street has a lot of very smart people. if the Fed doesn't tell them what they are going to do, they will figure out what is right based on their own analysis, but will not all see things the same way, more balance in positions, and less fragility in the system. and less fragility in the system is a worthwhile goal in its own right.
First, you are arguing that guidance is bad because traders will treat it as cast in concrete with guaranteed returns. Again, I don't care about traders, and as long at the Fed is willing to change plans if circumstances change, more information is better.
The interest rate guidance is useful for companies making investment decisions, and those companies are not staffed with parasites paid to analyze and arbitrage the rates.
Second, your cause and effect timeline is off for the Tech bubble.
Except history shows the Fed is reluctant to change their view once they’ve guided. And companies can do their own analysis. The Fed’s job is managing inflation, not holding corporate treasurer’s hands
The second point seems to indicate you are unaware of the portion of the economy that is from businesses with fewer than 500 employees. Most people are employed at places where the "Corporate Treasurer" is an accountant at best, and more likely just a lightly trained QuickBooks wrangler.
I try not to pay much attention to the Fed . I buy individual stocks only . In general , I usually start paying attention after the second consecutive cut or hike as that tends to change the sentiment toward dividend payers . I can tolerate 3.75% on my T bill but not 3.25 or lower because that puts KO in the game .A qualified dividend with a 50 years history of consecutive dividend increases . If T bill pay 4.5% I:will “ t bill and chill “,
That may or may not be a good idea to respond to markets rather than influence. But the congressional mandate remains respond to employment and inflation. There is no approved market movement inputs.
Perhaps he should consider lapel brooches for the press to interpret...
(merely thought it was humorous)
Excellent point that one material and negative effect of shadow chair is opportunity for private access, crony capitalism.
great piece!
He might have tried a soft communication transition step-down from Powell to establish a minimal independence but we must now assume the worst about Warsh's transparency problem. Does he even have a stance beyond what his appointer will demand?
We all know the forward guidance would stay and be louder if it was friendlier to Trump.
Dr. Sahm,
Thanks for this post.
Congress gave the Federal Reserve a clear dual mandate—price stability and maximum employment—not a mandate to manage market vibes or to mute itself for political convenience. When a Chair retreats from communication, markets don’t become calmer; they simply fill the vacuum with noise, speculation, and self‑reinforcing narratives. That’s not monetary policy—it’s drift.
The Fed’s real strength is the quiet, disciplined use of macroeconomic tools that no other institution in the country possesses: the ability to read the full banking system in real time, to anchor expectations, and to act with enough independence to take the long view when elected officials cannot. That independence is the guardrail that has kept the U.S. economy from veering into the ditch more than once.
We’ve seen what happens globally when central banks become extensions of political will: inflation expectations unmoor, fiscal dominance takes over, and credibility evaporates. The United States avoided that fate because the Fed has historically been willing to speak clearly, act transparently, and own its decisions.
If the next Chair chooses silence over stewardship, or political alignment over institutional duty, the cost won’t be measured in headlines. It will be measured in lost jobs, higher borrowing costs, and diminished trust in one of the few remaining institutions capable of stabilizing the economy. The mandate hasn’t changed. The responsibility hasn’t changed. The Fed must remain independent, data‑driven, and willing to use its full macroeconomic power to meet the obligations the country has placed on it.
"If the next Chair chooses silence over stewardship, or political alignment over institutional duty, the cost won’t be measured in headlines. It will be measured in lost jobs, higher borrowing costs, and diminished trust in one of the few remaining institutions capable of stabilizing the economy". That's the plan! It's all laid out in Project 2025.
Perhaps Warsh is following the old adage: It's better to remain silent, and be thought a fool, than to speak and remove all doubt.
It's too late for that. He's already removed all doubt.
A thing I think about: will Warsh be resolutely silent when/if he has relatively "better" news to share, e.g., inflation down, employment up, both settling in the ranges the Fed historically prefers? To me, that will be a useful sign of whether he's a serious Fed Chairman or just another result-oriented Trumpian hack.
Post Trump perhaps some degree of Fed Clarity may return. Until then I perceive a choppy price world until tariffs and wars are not influencing the micro and macro environments.
Warsh is either confused or letting in confusion when he does not distinguish
a) guessing about future movements of policy instruments, appropriate and long over due, (decisions are supposed to be data driven, not subject to quasi-promises)
from
b) explaining the reasoning of the FMOC in the decision it took and predicting the results of that decision for inflation, unemployment, etc.
Perhaps he was only signaling independence or grandstanding, but "price stability" is a violation of the Fed's mandate. Taken literally, It is grounds for impeachment.
https://thomaslhutcheson.substack.com/p/regime-change-at-the-fed
Mr Warsh has a rare situation that he faces with his predecessor: any non-downward forward guidance he might offer will generate a significant and potentially dangerous political reaction. While he might survive a political showdown, he might not, and the consequences of losing would, be, IMHO, umm-undesirable. He may think that the course of wisdom would be to fly below the radar, and issue unpopular guidance only when the objective conditions strongly support the action and he has the board behind him. (Mr Warsh's actual views remain unknown, at least to me).
In light of the current inflation being unnaturally instigated, Would raising rates really be appropriate? Would raising rates even work?
Lack of accountability is the hallmark of the Trumpkopf regime, and Warsh being Trumpkopf's pick for Fed Chair effectively makes him a member of the regime. As is the case for everything else with the King's Klown Kar, we're heading into rough seas.
I think you underplay the benefits of less communication from the Fed, the reality that traders must now think for themselves as to the value of a trade and position taking into account they may be wrong. excessive leverage for an arbitrage trade with the Fed telling you rates would be lower for longer was the norm. if a trader isn't sure, position sizing will shrink and systemic risk will be reduced.
personally, I think this is a much better solution. when Paul Volcker was Fed chair, there were essentially zero people who could name anyone else on the committee, and as he rarely spoke, markets had to make decisions on their own, as it happens, positioning was much smaller because of that and systemic risks reduced.
But the Fed forward guidance should be just that. Even if they lowered rates and commented that they expected to lower rates in the future, it was conditioned on the major economic trends continuing.
The research indicates that guidance increases the impact of Fed policy, which is to say that, for example, if the Fed believes the economy needs stimulus, an interest rate move plus guidance is better than just the interest rate change on its own.
The only question is whether the Fed sees guidance as a commitment, and refuses to change rates if circumstances indicate the previous action was inadequate or wrong.
Perhaps they need more clarity in the statements to make it clear that the guidance is based on current conditions.
Given the importance of the rate on long term economic planing, forcing the public to play "connect the dots" is a strange decision.
As for traders doing arbitrage on the rates - I don't really care. The real point is providing planning insight on the cost of debt for organizations actually building the economy.
"if the Fed believes the economy needs stimulus, an interest rate move plus guidance is better than just the interest rate change on its own."
"Plus guidance _inflation_" not "guidanace" on which instrument it intends to use to generat that inflation.
Good point. I was using one specific example of the tools available to the Fed.
I disagree, allowing traders to overload a position assuming they have the Fed at their back is what created the instabilities that led to the Tech bubble and then the GFC. that combined with additional regulation reining in banks utilization of their balance sheets has resulted in non bank financing with limited oversight, like the current private credit situation, and opened the door for significant market dislocations, which lead to economic ones.
Wall Street has a lot of very smart people. if the Fed doesn't tell them what they are going to do, they will figure out what is right based on their own analysis, but will not all see things the same way, more balance in positions, and less fragility in the system. and less fragility in the system is a worthwhile goal in its own right.
First, you are arguing that guidance is bad because traders will treat it as cast in concrete with guaranteed returns. Again, I don't care about traders, and as long at the Fed is willing to change plans if circumstances change, more information is better.
The interest rate guidance is useful for companies making investment decisions, and those companies are not staffed with parasites paid to analyze and arbitrage the rates.
Second, your cause and effect timeline is off for the Tech bubble.
https://www.richmondfed.org/publications/research/econ_focus/2022/q4_federal_reserve
"In February 2000, under Greenspan, the committee first began regularly including an early form of forward guidance in its policy statements".
Except history shows the Fed is reluctant to change their view once they’ve guided. And companies can do their own analysis. The Fed’s job is managing inflation, not holding corporate treasurer’s hands
"managing inflation AND employment."
The first point can be fixed.
The second point seems to indicate you are unaware of the portion of the economy that is from businesses with fewer than 500 employees. Most people are employed at places where the "Corporate Treasurer" is an accountant at best, and more likely just a lightly trained QuickBooks wrangler.
We will simply disagree on this
I try not to pay much attention to the Fed . I buy individual stocks only . In general , I usually start paying attention after the second consecutive cut or hike as that tends to change the sentiment toward dividend payers . I can tolerate 3.75% on my T bill but not 3.25 or lower because that puts KO in the game .A qualified dividend with a 50 years history of consecutive dividend increases . If T bill pay 4.5% I:will “ t bill and chill “,
The idea that one cut or increase presages another is something else that ought to change.