Claudia Sahm’s bottom line is this: A good policy decision was undercut by a communication problem: Warsh’s framework diverges sharply from the rest of the FOMC’s, and his refusal to articulate his own model turns routine transparency into destabilizing ambiguity. Warsh should fix this by doing the one thing his press conference conspicuously avoided: telling us what framework he actually uses, rather than reciting the standard tools—below-trend growth, the neutral rate, the SEP, forward guidance—that he rejects.
Concretely, she wants him to:
state what role he sees for monetary policy if not macroeconomic stabilization;
name the channel through which he thinks higher rates lower inflation
now that the labor-shortage buffer of 2023–24 is gone and
expectations are already anchored,
leaving demand as the obvious candidate he won’t claim;
explain how he judges the appropriate level of the funds rate if the neutral-rate benchmark is off the table;
articulate a stopping rule—which, as she points out, is just his own Jackson Hole hiking standard “with the sign flipped,” and requires no forward guidance to say aloud.
Underlying all of it is a communication fix: use the press conference for its intended purpose—explaining and answering for the Committee’s decision straight to the public—rather than shortening it, barring follow-ups, and editorializing selectively on growth while staying silent on rates. Do that, and the confusion that drove market rates above what the committee intended goes away.
And she laments:
He continues to tell us which standard tools he doesn’t use. He has not said what he uses instead. As a critic of the Fed, that limited his impact; as Fed Chair, it is causing unnecessary confusion…
But, Claudia, it is necessary confusion given that the point is to triangulate in order to limit the surfaces he leaves open to attack from either a disappointed Trump or a disappointed bond market. Don’t pretend he is playing chess when he is actually playing blind-man’s-bluff:
<https://stayathomemacro.substack.com/p/questions-for-the-chair> <https://stayathomemacro.substack.com>
Last week, the Fed raised its policy rate by a quarter percentage point to a range of 3¾ to 4 percent, on a unanimous vote. That’s a notable shift: at the Fed’s meeting six weeks earlier, only three of the twelve voters had favored a hike. In its one sentence of explanation, the FOMC statement said that it “will support a timelier return to the Committee’s 2 percent [inflation] goal.” In the Summary of Economic Projections, officials centered on one more hike this year, with rates ending next year at that same level. Modest rate increases with a modest goal: that’s the outcome I argued for before the meeting. The Fed also ignored the political pressure not to hike before the midterms. I agree with the Fed’s decision, though I would never celebrate a rate increase.
It was a good meeting. As I said on NPR the next day, the Fed’s rate hikes are not a cure for inflation, but they will help keep a bad situation from getting worse. Real relief will require a resolution to the conflict in the Middle East and no new tariffs.
In some ways, that’s where this update on the Fed decision should end, but Warsh also held a press conference. He was clearer than in July, but his answers still raised questions, and today’s post uses them to frame mine. I want to understand Warsh’s approach. Monetary policy has shifted significantly over time, and there’s no reason to treat the status quo as perfect; he may see something the standard framework misses. Regardless, as best I can tell, his views diverge fundamentally from those of the rest of the committee, and that gap is what he owes us an explanation for.
It’s not an academic quibble. Markets read Warsh as hawkish, and pricing of future rate hikes rose as soon as he began speaking at 2:30 pm. The implied rate for the end of 2027 climbed about as much during the press conference as it had on the 2:00 pm release of the statement and projections, and the ten-year yield rose more while he talked than it did on the release. I doubt Warsh intended that outcome, and the committee almost certainly did not. I put it down to confusion, in markets and among Fed watchers, about how Warsh approaches monetary policy.
After listening to Warsh’s presser, my questions for him range from foundational to operational. I suspect that once we have a better sense of his approach to monetary policy, the pressers will be more useful for markets and for the public.
Monetary policy is a tool of macroeconomic stabilization. It smooths out the bumps and wiggles in the economy around its trend: the Fed fights recessions and overheating alike, but it does not try to move the trend itself. Longer-run fundamentals belong to other policymakers.
Warsh spends more time on longer-run fundamentals than any Fed Chair I can recall. In his opening remarks, a prepared statement, he invoked growth several times:
The Fed has a role in
sustaining the economic progress happening in America right now, and the rising opportunities that come with it. Those who are least well-off have the most to gain from a durable expansion, a solid labor market, and stable prices.We at the Fed are unwavering in our vital and straightforward purpose: Full employment and price stability,
and a thriving American economy that sets the standard for the world. [Emphasis added.]
These are important goals, but are they the Fed’s goals? Warsh himself ▶was critical when past Fed Chairs strayed into topics like inequality. And talking up growth this much reads as hawkish, because when a Fed Chair dwells on how strong the economy is, markets hear a Chair who thinks it needs cooling. So, at a basic level, what role does Warsh see for monetary policy? If it is something other than macroeconomic stabilization, that is a sharp difference from the rest of the committee.
Closely related is how Warsh thinks monetary policy brings inflation down. In the presser, Jennifer Schonberger of Yahoo Finance asked about the standard mechanism:
Now that you have hiked rates, do you need to push growth below potential, unintentionally pushing weakness on the job market to bring inflation down?
Warsh did not accept the premise that below-trend growth is part of the process:
First, we believe that the unemployment rate is basically running consistent with full employment. I don’t believe that we need to do harm to the labor markets to achieve our objective. I don’t believe that the two parts of our mandate, price stability and full employment, are working at cross purposes over the medium term.
So, economic growth, that is ensuring continuous, sustainable, durable, economic growth, that’s the business we’re in, and the job we did today, the job we’ll continue to do, is to ensure price stability, which can mean that sustainable, durable, economic growth can go on for longer. The economy can be stronger, and as I mentioned before, the least well off can get the benefits of it.
There are times, such as 2023-24, when inflation falls with little cost to employment or growth. But that hiking cycle started with a labor market in shortage, nearly two job openings for every unemployed worker, so cooling it meant fewer vacancies rather than fewer jobs. The labor market is now in balance, and that buffer is gone. A channel that could deliver disinflation at low cost is credibility: if a hike convinces firms and workers that inflation will fall, the Fed has to take less demand out of the economy to get there. But market- and survey-based measures of longer-run inflation expectations have been stable, so there is little lost credibility to restore. That leaves demand as the channel.
So how does Warsh think higher rates reduce inflation, if not by restraining demand? Monetary policy operates through many channels, and it would help to know which ones he has in mind. The Fed Chair should be transparent about the potential costs of rate increases. Warsh’s framing last week was more upbeat than I associate with the start of a rate-hiking cycle.
There are also operational questions. The Fed raised its policy rate to a range of 3¾ to 4 percent. How does Warsh know that is the right level? Steve Liesman of CNBC posed the question in terms of the neutral rate:
Previously most Fed officials have described the rate as modestly restrictive. And if you removed accommodation,
could you give us your sense of where the Fed funds rate is relative to neutral? And some detail, if you wouldn’t mind, on your sense of is there a short-term neutral rate you’re aiming for and a longer-term neutral rate? Do you think in terms of those?
Warsh was clear that the neutral rate is not useful to him:
In a word, no. In a few words I’d say this, I’ve always been interested in
a neutral rate as an academic matter.Back when I learned economics we used to think of it as the Wicksellian rate, the real equilibrium rate. It’s useful academically, it’s -- it’s a discussion to help us think about policy.Do I think it has any operational effect on decisions that we make today? No, I don’t.
The neutral rate has been a central concept in monetary policy for decades. Powell pushed back on false precision in the estimates, but it remained the benchmark for judging the level of the funds rate: above neutral, policy is restrictive; below, it is accommodative. What is odd is that Warsh framed the decision as “removing a dose of accommodation” and then distanced himself from the concept that defines accommodation. The rest of the FOMC has views on it; every participant but Warsh submitted a longer-run estimate, and the median is 3.25 percent, below the funds rate even before the hike. By the committee’s own numbers, policy was already above (longer-run) neutral. So if not the neutral rate, how does Warsh judge the level of the funds rate?
The word choice mattered. “Removing a dose of accommodation” was heard as saying the funds rate is still accommodative after the hike, with more doses to come. That is another reason the market priced in more hikes as he spoke.
Maybe Warsh doesn’t need a firm view of the appropriate level of the funds rate to know it needed to be higher. But now that the Fed has hiked, how will he judge whether to hike again, and when to stop?
The rest of the FOMC put its answer in the dot plot. The dots are not a commitment, but they sent a clear signal: a modest cycle of 50 to 75 basis points in total, far short of the 3 percentage points in the median hiking cycle. Warsh did not submit projections, and at the presser he distanced himself from the committee’s. Michael McKee of Bloomberg asked:
You said in Jackson Hole that you want to see inflation come down clearly and at sufficient speed, which is a standard without necessarily a measurable threshold... today you say today’s policy action will support a timelier return to the Committee’s 2 percent target, and yet, in the Summary of Economic Projections, the median pushes [reaching] the 2 percent target out to 2029... how can you square those two things?…
Warsh:
One easy way to square that, Mike, is
those aren’t my forecasts.Those are the forecasts of my 18 colleagues, and I’ve tried to represent them dutifully to you.My business is to not give forward guidance... what I said in Jackson Hole in August is, we’re committed to a discipline, not to a decision. Today’s action starts to show we’re serious about this... But I’m ill-prepared to pre-judge those future actions…
No one is asking Warsh to pre-judge future actions. The SEP is a thought experiment, not a commitment: given what we know and where the economy is likely headed, what will policy need to do to meet the mandate? Warsh may not see value in the exercise. But he set a standard for hiking, confidence that inflation is moving to target clearly and at sufficient speed. The standard for stopping is the same sentence with the sign flipped, and he could say so without a word of forward guidance.
Warsh has changed the press conference. Last week’s ran 30 minutes, the shortest in memorty outside of an emergency presser during the pandemic; Powell’s last five averaged about 50 minutes. Journalists were not allowed follow-up questions. And Warsh has not stuck to presenting the Committee’s views, as past Chairs did. When Victoria Guida of Politico asked whether he had learned anything about communication from the market’s fixation on the August CPI, he answered:
Markets over time will come to understand how this Fed makes its decisions, what’s relevant and not. And I wouldn’t want to editorialize that for them.
The press conference exists so the Chair can explain the Committee’s decision and answer for it. It is a hard venue for any Chair, and it is part of the job. Warsh does not want to give forward guidance on rates, which is his prerogative, but he is comfortable offering plenty on the prospects for American growth, so the editorializing is selective. It would help to know the principles behind his pressers: what he thinks they are for, and how he squares a shorter, narrower format with the Fed’s accountability. The Fed’s decisions affect millions of Americans. They should hear the reasons straight from the Chair.
The Fed raised rates last week, and at least one more increase is likely. The start of a hiking cycle is always a serious moment, and this one is no exception: inflation is elevated, and disinflation is far from guaranteed. The Fed met the moment. A new Chair adds to the challenge, but that is surmountable. What we need is a better understanding of how Warsh approaches monetary policy. He continues to tell us which standard tools he doesn’t use. He has not said what he uses instead. As a critic of the Fed, that limited his impact; as Fed Chair, it is causing unnecessary confusion. Last week, that confusion showed up as higher market interest rates than the committee intended, and Americans pay for that.
<https://stayathomemacro.substack.com/p/questions-for-the-chair> <https://stayathomemacro.substack.com>
- Brad DeLong here*: I understand that to stay court-acceptable in the finance-guru discourse in which she swims, Claudia Sahm has to pretend that Kevin Warsh is
But the rest of us do not have to do that! We do not have to pretend! We can say what is going on! Which is that, to improve the American economy, the single best thing Warsh could do is resign immediately! Sober probity is something a Fed Chair needs, and that someone like him who campaigned for the job inside the White House by doing a Trump Lickspittle cosplay act cannot regain.
##macro-outlook
##chaos-monkey
##neofascism
##crosspost
#claudia-sahm-questions-for-the-fed-chair-kevin-warsh
#claudia-sahm
#questions-for-the-fed-chair-kevin-warsh
#kevin-warsh
#federal-reserve
#monetary-policy
#neutral-rate
#fed-communication
