The senior leadership of the Federal Reserve has erupted into a debate over direction—how far can Warsh's "silence strategy" go?

Original author: Bao Yilong

Original source: Wallstreetcn

Divisions have emerged within the Federal Reserve over communication strategy, with Warsh's "talk less" approach meeting resistance from colleagues.

On October 27, Nick Timiraos, the "new Fed news wire," wrote that Fed Chair Warsh has been pushing a new communication style of "silence is a virtue," but failed to persuade most colleagues to follow suit, causing the committee to send out noisy and scattered signals to the public and leading market expectations for an October rate hike to plummet from 70% to 15% in just one month.

According to the article's tally, between the end of the last policy meeting and the start of this week's meeting blackout period, 16 Fed officials who have served for a full year delivered no fewer than 59 speeches, interviews, and public statements combined—roughly on par with about 54 during the same period a year earlier.

This figure indicates that although Warsh deliberately curtailed his own remarks after taking office as chair in May, other officials have rushed to fill the void and set out their views individually.

The direct consequences of these divisions have already been clearly visible in the market. After the Fed raised rates last month, the market inferred from Warsh's remarks at the press conference that consecutive rate hikes were relatively likely; afterward, the two vice chairs spoke one after another, suggesting there was no rush to act immediately, and the probability of an October hike immediately fell sharply.

Kathy Bostjancic, chief economist at Nationwide Mutual Insurance Company, said:

If Warsh doesn't speak, someone else will fill that void.

The battle over communication strategy: whether to tell the market the "reaction function"

The essence of this debate is not whether to restore commitment-based forward guidance—almost no officials want to return to the pre-2021 approach, when overly explicit rate commitments were seen as delaying the Fed's response to inflation.

The article points out that the core disagreement is: should officials still explain to the public how they will respond to economic changes?

Warsh's position is clear. He believes that continuously narrating the policy outlook locks officials into their own forecasts while blurring the signals the market can reflect back to the Fed. He said this month in Bangkok:

I'm not going to say now what I might do at the remaining meetings this year. This is a new chapter for the Fed; we don't do that anymore.

Richmond Fed President Tom Barkin, who supports this stance, also told reporters that he "very much welcomes the fact that this seems to be becoming an institutional convention." Barkin consistently talks about economic conditions but almost never comments on specific meetings.

Opposing voices: failing to explain the framework only "creates noise"

However, several officials have publicly defended fuller communication.

Cleveland Fed President Beth Hammack said in a speech this month that if households or businesses "borrow under a mistaken judgment about the direction of policy, the cost could be very high."

She stressed in an interview that explaining one's own thinking framework is not the same as making a commitment:

What they hear is not a commitment, because I did not give a commitment; I was explaining a framework.

St. Louis Fed President Alberto Musalem directly refuted in a speech in London the logic that "talking less allows the market to focus on data," saying that a central bank that keeps its framework secret "does not make the market focus on data; speculation only creates noise."

He added:

The choice before a central bank is not between noisy overcommitment and saying little, but between letting the public guess on its own and proactively informing them.

Both Hammack and Musalem assumed their current roles in 2024, both come from financial industry backgrounds, and both have consistently been representative voices advocating further rate hikes this year.

The "experiment" meets a reality check, former officials issue warnings

This communication experiment quickly came under stress testing after last month's rate hike.

Nick Timiraos pointed out that the market inferred from Warsh's remarks and economic data that the probability of consecutive rate hikes in October was relatively high; afterward, the vice chairs spoke one after another to correct course, suggesting there was no rush to act again, and market expectations immediately reversed.

Fed Governor Christopher Waller described this episode as showing the limitations of sharply compressing forward guidance, saying it was tantamount to "throwing the baby out with the bathwater," and said bluntly:

I can't think of anything that looks more like forward guidance than what happened that week.

Former Fed Vice Chair Donald Kohn said that before sending such a large signal to the market, he used to first share the content of his remarks with then-Chairs Greenspan or Bernanke and seek their views.

He said the two never objected. Kohn said:

The current situation shows that at least some committee members are uncomfortable with such sparse forward guidance, because the market is moving ahead of where the committee wants to guide it.

The committee lacks consensus, and the disorder may continue

What makes the situation even more complicated is that officials currently not only differ in their judgments about the economic situation, but also have failed to form a unified narrative on the policy path.

The article points out that some officials believe monetary policy is clearly too loose; others see this round of rate hikes more as an insurance-like response to the risk that years of high inflation have entrenched price expectations.

Jonathan Pingle, chief U.S. economist at UBS, said that under normal circumstances, the chair's remarks can provide other officials with a common language they can cite, and having the chair speak for the committee "can bring a certain coherence, and I think that is exactly what is lacking now."

Former Fed economist Claudia Sahm summarized the current situation as "the worst of all possible outcomes." She said:

No one can force him to speak for the committee, and frankly, he cannot force other committee members to shut up either.

At present, a working group composed of outside experts is drafting recommendations on how the Fed communicates, expected to be submitted before the end of the year. Warsh said any changes must be decided by the full committee.