Memo to Kevin Warsh — and to the Wall Street firms giving him a free pass: Quit the silent treatment. The American people are paying the Federal Reserve to make judgments about risks and returns in real time, and it’s embarrassing that a chairman who took an oath of public service now refuses to tell the public what he sees. Your clients are paying you a lot to demand answers from the institution that moves markets with a single sentence, and it’s shameful when you stay silent just because Chairman Warsh has decided the rest of us don’t deserve to know what he’s planning.
We’re sorry for ruffling feathers at the Eccles Building, but someone has to say it: the wall of deference greeting Mr. Warsh this week was unearned. The second Federal Open Market Committee meeting he led in his still-new tenure on Wednesday left the overnight Fed funds rate target range unchanged, though with three dissenting votes in favor of an increase. Three voters on his own committee wanted action. The chairman wanted quiet.
In his press conference following the meeting, Mr. Warsh delivered a hollow reassertion that the Fed aims for 2% inflation and not 2%-plus-what-we-think-we-can-get-away-with. He otherwise stuck to his determination to deprive the public of forward guidance on future rate moves. Contempt for accountability from the same quarters that would be howling for transparency if a Democratic Fed chair tried this.
This distills to two complaints, and both are fair — not because their proponents are sympathetic but because a Fed that will not speak is a Fed that will not be held accountable, and a Fed that cannot be held accountable has surrendered the only check the public has on it. The first is that Mr. Warsh is blowing his credibility by not raising interest rates to tamp down stubborn inflation, especially with a new Middle East energy-price shock looming. This crowd is right. Rising bond yields since Wednesday, especially at the long end of the curve, signal that investors doubt Mr. Warsh will bring inflation under control. The 10-year Treasury at about 4.74% is lower than it was for most of the 1990s and the entirety of the ’80s, and a shock nonetheless to everyone who has only known the Fed’s cheap money. Ditto the 30-year at 5.28%. As of Thursday, the average annual inflation rate investors anticipate over the next decade, as measured by the 10-year breakeven on inflation-protected bonds, was 2.27% — above the Fed’s target, a tax on every dollar a working family spends — and its decline from the 2.5% inflation priced in May has not shown up in anyone’s bills. A history lesson about the 1980s does not address whether this Fed chair is responding to the evidence in front of him today.
An alternative explanation for the recent rise in long rates could be anticipated economic growth as investors continue to digest the artificial intelligence boom. Friday’s rising yields were accompanied by good days for equities around the world. Enthusiasm for stock investments seems to have drawn capital into those markets and pushed up bond yields to compensate. It all sounds so old-fashioned, and also, dare we say, normal — for the people who own the stocks. All of which makes the case for more transparency, not less — markets processing real information need reliable signals from the institution that sets the price of money. We don’t know which of these factors is driving markets now. Neither, we’d venture, does Mr. Warsh. That is the point: a Fed that cannot say what it sees is a Fed that has stopped doing its job. Which leads us to the real problem — that Mr. Warsh isn’t telling investors what to do, and he isn’t giving them what they need to figure it out for themselves.
This encompasses several legitimate concerns. One is that by abandoning the Fed’s prior practice of sending clear signals about its future rate intentions, Mr. Warsh is forfeiting the Fed’s ability to manage the longer end of the bond yield curve. A chairman who dresses new silence in old modesty is not returning to tradition; he is hiding behind it. Mr. Warsh has said this loss of control is a feature, not a bug. For the billion-dollar trading desks that can hire their own economists and build their own models, it may be. For the pension funds, municipal treasurers, community banks, and small investors who relied on Fed guidance to manage risk, it is a wall raised between them and the information they need to protect the public’s money. He wants market participants to “play the ball and not the referee.” But the Federal Reserve is not a referee; it is the biggest player on the field. A referee who refuses to make calls does not create order. He invites a brawl. The Fed does not just call the plays; it sets the rules and holds the ball. A player who won’t throw cannot blame the field for confusion. Demanding clarity from a public institution is not whining — it is the minimum accountability citizens and investors should expect. Speech at least leaves a record. A silent Fed head-fakes daily, and no one can quote a word of it.
A related complaint is that the Fed is too important to be this quiet, and it is the whole point. It is more true than it used to be: repeated rounds of quantitative easing made the Fed a major participant in the Treasury market. The Fed’s guidance has often been wrong and damaging — incorrectly forecasting inflation, trapping itself in policy errors — and the answer to wrong guidance is not silence. It is accounting to the country that paid for the mistakes. An 800-pound gorilla that sits quietly does not stop being 800 pounds. It stops being answerable. Would the Journal prefer Mr. Warsh operate behind closed doors with no public scrutiny? That arrangement suits the players sophisticated enough to read tea leaves from Fed speeches and proprietary trading patterns. It leaves everyone else guessing.
Much of this is about politics — Mr. Warsh’s own. One undertone to this debate is that many of his defenders want to insulate him from any pressure that might produce a rate increase antagonizing President Trump. So? An independent Fed should be willing to antagonize any President — especially the one who appointed its chairman. The editorial pages would love nothing more than a Fed chair who never raises rates, never explains why, and never answers to anyone except the market’s most privileged participants. A press corps that wants a fight is a sideshow. The question is why a chairman with nothing to hide has nothing to say.
There’s also the awkward question of what markets do when the cheat-sheet disappears. Not since 2008 have trading desks had to operate without clear Fed signals — and the last time they were left to their own judgment, it produced the worst financial panic since the Depression. The guidance Mr. Warsh scorns was never a cheat-sheet for insiders; it was the one window the public had into the central bank. That’s roughly a generation of market participants who learned to price risk with a baseline of public information, and who now have that baseline yanked away in the name of letting markets “do their job.” The firms that profit from information asymmetry will manage. The public institutions investing retirement savings and tax revenue will pay the price.
Mr. Warsh knows his reputation is on the line concerning his ability to deliver price stability. It should be. It has been all of two meetings and 71 days since he took on the job, and in two meetings and 71 days he has convinced the bond market that the Federal Reserve has nothing to say. The alarm from investors who lack the resources to go it alone is not premature. It is overdue — and it reflects on Mr. Warsh exactly what it should.
