Fed’s Warsh seeks to avoid forward guidance. His colleagues aren’t listening

Federal Reserve Chair Kevin Warsh has sought to move the central bank away from forecasting its policy decisions during his four-plus months in charge. But after the Fed raised interest rates earlier this month, multiple officials have indicated future hikes are coming.

“If the economy evolves in a manner broadly consistent with my forecast, one further upward adjustment of the federal funds target range may be appropriate late this year to support a timelier return of inflation to target,” Federal Reserve Bank of New York President John Williams said Tuesday.

Dating to his confirmation hearing, Warsh has argued the Fed should drop “forward guidance,” its outline of future monetary policy dating to the tenure of former Fed Chair Alan Greenspan.

The Fed chair reiterated his stance in July, arguing the ditching of forward guidance from the central bank’s June announcement that it was holding interest rates steady allowed investors to “play the ball, not the referee.”

Yet multiple members of the Federal Open Market Committee (FOMC), which sets rates, have previewed their calls on monetary policy.

“I don’t think they … feel compelled to follow [Warsh] on [not providing forward guidance]. I don’t think they’re sticking their finger in the eye. I think they’re just like, ‘That’s your view. This is our view,’” Stephen Myrow, the managing partner at Beacon Policy Advisers, told The Hill.

After the FOMC voted unanimously this month to hike its baseline interest rate range by a quarter point, to between 3.75 percent and 4 percent, Warsh doubled down on his preference to avoid forward guidance, saying he was “not going to prejudge any future decisions” the panel makes.

Warsh’s preference has even applied to the FOMC’s quarterly summary of economic projections released in June and earlier this month, as the Fed chair was the only one of 19 officials not to provide his forecast on future monetary policy decisions for the committee’s “dot plots.”

Fed officials, including Williams and Federal Reserve Bank of Philadelphia President Anna Paulson, have stressed the need to monitor incoming data ahead of the FOMC’s next meeting.

“As always, I’ll be watching the data and listening closely to what businesses and workers are telling me,” Paulson said last week at a financial technology conference.

“With the policy action we took at our September meeting, there is no need for urgency, and we have time to gather more information,” Williams said Tuesday at the University of Buffalo, adding more data “should provide greater clarity on the underlying trends in the economy.”

But central bank officials, noting that inflation remains above the Fed’s 2 percent target amid the Iran war and rising demand for artificial intelligence data centers, have also reiterated what the latest dot plot signaled: at least one more rate hike is in store before the calendar turns to 2027.

“Looking ahead, if conditions evolve as I expect, some modest further tightening may be warranted,” Paulson, a voting member of the FOMC, said at a financial technology conference last week.

“In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion,” Fed Governor Michael Barr said Tuesday at the Detroit Economic Club.

When reached, a Fed spokesperson did not provide comment on Paulson and Barr’s remarks.

Myrow, who worked at the Treasury Department during the George W. Bush administration, argued officials “don’t want to go out of their way to pick a fight” with Warsh.

He also noted regional Fed presidents, a category Paulson and Williams fall under, typically feel more “independent” from the central bank’s Washington headquarters.

Dan Alpert, executive chair at Westwood Capital, said the “whisper campaign” from Fed officials was more a reflection of what FOMC members discussed at their last meeting than pushback against Warsh’s opposition to forward guidance.

“Warsh had to reclaim his credibility after his initial pressers and so they hiked [by] 25 [basis points]. His lack of candor regarding anything other than he’s ‘serious about inflation’ leaves the Fed-dom without an anchor,” Alpert said via email.

Warsh himself also dangled some forward guidance last month, saying the Fed had “work to do” if inflation was not moving towards its 2 percent goal.

“The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank. And that is where it belongs,” he said in Jackson Hole, Wyo.

Fed officials received positive inflation news on Wednesday, in the form of the Bureau of Economic Analysis’s (BEA) personal consumption expenditures (PCE) price index.

Annual inflation was 3.4 percent in August, as measured by the PCE, down from 3.7 percent in July and lower than expectations from the Federal Reserve Bank of Cleveland. Excluding more volatile food and energy prices, prices were up 3 percent year-over-year last month, per the PCE.

Traders as of Wednesday afternoon, after the BEA released the data, were pricing in a nearly 63 percent chance of the Fed holding rates steady next month, according to the CME FedWatch tool.

That marked a reversal from earlier in the week, when traders were pricing in a roughly 7 in 10 chance of another quarter-point hike.

Robin Brooks, a senior fellow at the Brookings Institution, argued Wednesday on social platform X the “dovish” PCE readings take an October rate hike “off the table.”

The next FOMC meeting will take place less than a week before the midterm elections, as President Trump urges the panel to cut rates. But there is precedent for the committee hiking ahead of an election, as it raised rates by three-quarters of a point in early November 2022 after inflation hit a 40-year high that year.

Myrow, of Beacon Policy Advisors, said that Warsh is not “opposed” to raising rates, arguing the Fed’s chair preference to stray away from forward guidance casts him as a “lagging indicator” instead of a leading one.

But the former Treasury Department official noted the Fed chair does not want to “get crosswise” with Trump, who appointed him to helm the central bank under the notion he would cut rates.

“I don’t think he necessarily wanted to raise rates, but he kind of boxed himself in with the Jackson Hole speech,” Myrow said of Warsh. “Because he was trying to … get the market to do his work for him by naturally raising rates so that he didn’t have to formally raise them.”

“But by … letting the market believe that he was a hawk, the market filled in the blanks that he left, and he was left with no choice but to raise,” he added.

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