As Warsh and the Fed contemplate fewer meetings, markets brace for potential volatility ahead
Federal Reserve Chairman Kevin Warsh has floated the idea of holding fewer policy meetings than the current eight, which could lead to increased volatility in the stock and bond markets.
Intelligence analysis by Llama
Federal Reserve Chairman Kevin Warsh has proposed reducing the number of policy meetings, which could lead to increased volatility in the markets.
Imagine you're playing a game where you have to guess what the other player is thinking. If the other player doesn't tell you what they're thinking, you have to make a guess based on what they do. This is kind of like what's happening with the Federal Reserve and the stock market. The Fed is trying to be less clear about what they're thinking, which makes it harder for the market to guess what they'll do next. This can lead to more uncertainty and volatility in the market.
Analysis
A Less Transparent Fed
Federal Reserve Chairman Kevin Warsh has been implementing several measures to reduce the central bank's footprint on financial markets. One of the latest proposals is to reduce the number of policy meetings, which could lead to increased volatility in the stock and bond markets. This move would further curtail the communications output from the Warsh Fed, and lead to some uncertain outcomes for the markets.
"Certainly, it's going to increase volatility," said George Catrambone, head of fixed income for the Americas at DWS Group. "Having less transparency forces market participants to hedge or have a wider dispersion of outcomes."
The Fed has used various meeting strategies over the decades. Until the early 1980s, it met nearly monthly before changing to eight a year under former Chairman Paul Volcker. Moreover, the Fed is free at any time to call an emergency meeting, though the market implications could be substantial given that such a move would be considered an emergency.
Minneapolis Fed President Neel Kashkari told CNBC on Wednesday that he is fine with re-examining the meeting schedule. "I don't think there's any magic number about eight or 10 or six. You know, we always have the ability to call emergency meetings if things happen, but that's a big event," he said.
Philadelphia Fed President Anna Paulson on Tuesday expressed similar sentiments, telling CNBC, "it's healthy to have a good discussion about that."
Other Fed experts take a similar tack that having a fewer meetings a year might not be a big deal to markets. "There's nothing magical about eight meetings," said Bill English, the Fed's former head of monetary affairs during Warsh's first stint there and now a Yale professor. "There are costs associated with having a lot of meetings, but on the other hand, you don't want to have so few meetings that you end up not acting in a timely way."
English said he once proposed six meetings a year, but with each including a news conference as well as an update to the Fed's Summary of Economic Projections. Overall, he sees eight as "close to the right number" and instead is more concerned about other aspects of Warsh's strategy.
"I really don't like this effort to communicate much less," he said. "Explaining more about why you're doing what you're doing helps the public to understand it. It helps the public to anticipate it. It makes monetary policy more effective, and also it it just seems like it's appropriate to make the Fed accountable."
So far, markets either have been willing to give Warsh the benefit of the doubt, or simply have been too focused on geopolitics to care about the Fed rumblings. The Dow Jones Industrial Average has added about 3,500 points, or 7%, since Warsh took over from now-Governor Jerome Powell on May 22. Bond yields on net have risen though not dramatically, with the policy-sensitive 2-year Treasury up about 8 basis points, or 0.08 percentage points, while the benchmark 10-year yield has risen about the same.
Stock Chart Icon Stock chart icon Dow since May 22
Those moves have come despite Warsh defying a tradition of open communication that dates back into the latter part of the 20th century while also establishing five task forces aimed at a top-to-bottom rethinking of the Fed's approach to policy, communications strategy and data utilization, among other things.
"He's kind of getting away with it," said Mark Hackett, chief market strategist at Nationwide. "Warsh is really the first Fed official that I've seen explicitly say he wants the Fed to have less direct impact on market movement."
Indeed, Warsh has told market participants explicitly that they should be reacting to data, not the vagaries of Fedspeak. "Market participants are learning to play the ball, not the referee — and market prices will continue to respond in the direction and magnitude they see fit," Warsh said during last week's news conference.
"This is, in my view, a change for the better — and we are just getting started."
Still, some investors think Warsh's strategy is risky. "The main takeaway is more volatility," Dario Perkins, head of global macroeconomics at TS Lombard, said in a note in which he deemed the result of Warsh's strategy "a recipe for disaster."
Key points
- Federal Reserve Chairman Kevin Warsh has proposed reducing the number of policy meetings, which could lead to increased volatility in the markets.
- The Fed has used various meeting strategies over the decades, and is free to call an emergency meeting at any time.
- Minneapolis Fed President Neel Kashkari and Philadelphia Fed President Anna Paulson have expressed openness to re-examining the meeting schedule.
- Other Fed experts take a similar tack that having a fewer meetings a year might not be a big deal to markets.
- The potential reduction in policy meetings could lead to increased volatility in the stock and bond markets.
If the Fed's strategy of reducing transparency and communication is successful, it could lead to more stable and predictable markets. This could be beneficial for investors who are looking for a more stable environment to make their investments.
The potential reduction in policy meetings could lead to increased volatility in the stock and bond markets, which could be detrimental to investors who are already facing uncertainty and risk.
