MNI INTERVIEW: Warsh Set To Dial Back Fed Guidance - Swanson

New Federal Reserve Chair Kevin Warsh will likely jettison the FOMC's easing bias next week and make only incremental changes to communication with markets, former Fed economist Eric Swanson told MNI. 

Having said repeatedly he intends to curtail forward guidance, Warsh should find ready support among FOMC members for removing language from the policy statement signaling a rate cut as the committee's likely next move, Swanson said in an interview.

Beyond that, institutional inertia and Warsh's own background as an investor are likely to temper his actions, he said. The dot plot, which Warsh has said leads officials to hold on to stale views, will likely stay, as will press conferences, though Warsh would probably opt for more equivocal responses, Swanson said. 

"I expect the communication won't be rolled back very much, just because he is a markets guy and the markets like the communication," he said. 

"Right now it's easy to take out the easing bias, because they're probably not going to be lowering rates anytime soon and they're hesitant to raise rates -- but probably they should. In that sense, now's a time when they probably don't have a lot of bias one way or the other, so it's an easy time to get rid of it," he said. 

"To some extent the SEP and the dots are all the forward guidance you need."

VAGUE PRESSERS

Warsh's critique, that markets have become overly dependent on Fed communications and that guidance constrains the central bank, may apply more to the chair's press conferences than the quarterly economic projections and dot plot, said Swanson, economist at the University of California, Irvine.

"Some people don't like the dots. One complaint is that some dots might matter more than other dots, and you can't see that. You don't know which dots are voting this year and which dots are not voting. I personally think the benefits outweigh those problems," he said. 

"I would like to see the Fed publish those every meeting rather than every other meeting. Having a nice centralized summary of where the committee is at discrete points in time is a good benchmark for the markets -- it gives them an anchor to focus on. The dots are not a commitment, and there's a range of views."  

Swanson pointed to his own research suggesting that Jerome Powell's press conferences may have actively misled markets during the Covid era.

"It never happened under Bernanke and Yellen. To some extent it might be Powell's fault. To some extent maybe it was a difficult time and the Fed chair struggled during that difficult time to communicate," he said. "But contradicting the FOMC announcement, which effectively some of those press conferences did, is bad communication."

Rather than eliminating press conferences, Warsh is more likely to simply offer less certainty in his answers, Swanson said. 

"He has the ability to have the press conference and just be a little bit more vague in his answers, so I would probably expect him to move that way." (See: MNI POLICY: Warsh Could Reshape Fed On Rates, Communication)