- Key insight: Central bankers from Europe and Canada echoed Warsh's concerns about being overly prescriptive in their forecasts.
- Expert quote: "What I found most exhilarating about the last two days here is the kind of discussions that we've begun at the Federal Reserve has a lot of people at this conference open-minded — [they] came to think anew about the conduct of monetary policy." —Federal Reserve Chair Kevin Warsh.
- Forward Look: Warsh said he will announce heads of his policy reform task forces — including one focused on communications — as soon as next week.
Federal Reserve Chair Kevin Warsh's push for a scaled-back communications policy is gaining traction with other top central bankers.
During a Wednesday panel event at the European Central Bank's Forum on Central Banking in Sintra, Portugal, Warsh said other monetary policymakers have been open to matching some of the reforms he is pursuing at the Fed, including a
"Reform does not stop at the water's edge," Warsh said. "What I found most exhilarating about the last two days here is the kind of discussions that we've begun at the Federal Reserve has a lot of people at this conference open-minded — [they] came to think anew about the conduct of monetary policy."
Seated alongside Warsh were the heads of the European Central Bank, the Bank of England and the Bank of Canada. They echoed Warsh's concern that too much public forecasting can have detrimental effects on monetary policymaking.
European Central Bank President Christine Lagarde said her institution has decided to "give up on forward guidance," noting that she has found it limits her ability to freely adjust to macroeconomic developments.
"Personally, and I've said this publicly, if I have one regret, it's to have felt bound and compelled by forward guidance," Lagarde said, noting that the ECB will instead focus on conveying its framework for decision-making and allow the public and market participants to interpret that information independently.
"They will have to do a bit of homework," she said. "They will have to look at the indicators that we're attending to, they will have to appreciate our intellectual process and what we are especially attentive to."
Warsh said Lagarde's reasoning for restrained communications matched his.
"I couldn't have said it better myself," he said.
Bank of England Governor Andrew Bailey — who stopped issuing formal forward guidance on interest rates in 2021 — also spoke about the pitfalls of forward looking statements on the economy.
"You can get locked into it very easily," Bailey said. "I've said a number of times in our committee, [forward guidance is] much easier to put it in place than it is to take it away, and therefore before you actually go put it in place, just think about what we're going to have to deal with as time goes by, because it becomes quite problematic after a while. It overstays its welcome."
Warsh, who served on the Fed Board of Governors during the global financial crisis, said explicit communications about long-term monetary policy actions are a useful tool in moments of instability. But, he has long argued that the Fed should not "spoon feed" markets in ordinary times.
Warsh acknowledged that it can be hard for central banks to pull back on this kind of informational support, but said his appointment to the Fed provided an opportunity for a reset.
"We've all been burdened with many of the policies that, in some sense, the Fed created in the 2008 financial crisis," he said. "This is a rare moment for us to go back to first principles, ask hard questions, review what we're doing at the Fed."
Skeptics of reduced communication argue that it needlessly injects uncertainty into financial markets, thus risking a bumpier implementation process for monetary policy. Warsh said that has not been the case since he took over at the Fed and scaled back the institution's monetary policy communications.
"If I look at trigger pullers, people that are making decisions in the bond market, in a range of markets, volatility is not up, it's down; yields aren't up, they're down; inflation expectations are down," Warsh said. "I hear this [criticism] as if people don't understand, [but] I think they actually understand quite well."
Inflation expectations have been elevated in
Along with transmission, some communications advocates say the Fed owes the public an explanation of how it sees the economy developing as means for holding the institution accountable. Bank of Canada Governor Tiff Macklem acknowledged this dynamic in his own approach to expectation setting.
"We've got to be helpful," Macklem said. "There's a lot of uncertainty out there, risks could shift quickly. The other part of our message is, if the situation changes, we're prepared to take action."
Apart from avoiding forward-looking commentary, Warsh said the Fed's approach to communications will remain unchanged while he awaits recommendations from a
"There will still be dots for a short time, at least," he said. "But we have a task force for that. We'll revisit it."
Warsh said he plans to announce the members of that task force as well as four others — focused on balance sheet management, the Fed's inflation framework, data sourcing and productivity in the broader economy — as early as next week. He indicated that the groups will consist of former central bankers, academics and other policy experts from outside the Fed.
AI and monetary policy
The four panelists also weighed in on the advancements in artificial intelligence and what it might mean for monetary policy in their respective jurisdictions. Among the biggest questions facing central bankers is how the potentially inflationary impacts of the surge in spending related to AI build-out can be offset by increases in economic growth and productivity.
Warsh said the U.S. is likely to be "a big winner over the medium term" from the AI boom, noting that he sees the investments in the technology as a more useful deployment of capital than the country has seen in recent years.
"Among our nations, the AI boom is showing itself first and very prominently in the United States. I'd certainly rather have this problem, where we have massive capital expenditures, instead of thinking years back where we had financial engineering, where we had companies that weren't able to deliver profits, so they would do shareholder buybacks," he said. "Well, right now, they're investing in the future, because their expectation is the supply side of the economy will expand, and if it does, that has huge implications for monetary policy."
While other central bankers on the panel acknowledge there could be a risk of net job losses as a result of AI proliferation, Warsh said he will be paying close attention to the timing of obsolescence versus new job creation, but noted that previous technological innovations have reshaped the workforce in unexpected ways.
"Who knew when the internet was born that the internet was going to create a million and a half jobs as Uber drivers?" Warsh said. "We are in the first or second inning of this revolution. This is a big paradigm shift, both for the content of our policy and for our economies. I think the jobs will be greater, prosperity will be stronger."
Federal Reserve independence
During the panel, Warsh said President Donald Trump's stated preference for lower rates would not change how he leads monetary policymaking at the Fed.
"We've been an independent central bank for a long time, we're going to be an independent central bank at this moment," he said. "And you're going to see no changes on that."
During the past several years — as president, civilian, candidate and then president again — Trump has
While many observers expected Warsh to at least signal a shift toward more accommodative policy once installed on the Fed, he has yet to do so. Instead, he has expressed no view about the path ahead while other FOMC members have indicated that higher rates might be necessary.
Asked to share his views on the recent
"We'll follow the Supreme Court decision, but day to day the decision reaffirms what President Lagarde already said: we are calling balls and strikes as best we can," he said. "We're taking seriously the reform objective, and we're going to deliver on the high promise that Congress gave us to deliver price stability in the context of our dual mandate, and when we do that, we don't have to worry about politics, we don't have to worry about judicial intervention, we get to look in front of us, because it's challenging."
