The Secret Truth About Kevin Warsh’s Fed
The dirtiest little secret inside the gilded menagerie of monetary policy is that Kevin Warsh’s supposedly radical new approach to central bank communications is far more conventional and not as new as it seems.
The first statement issued by the Federal Open Market Committee under Warsh’s chairmanship was far terser than those typically put out by the committee under his predecessors, from Ben Bernanke through Janet Yellen to Jerome Powell. His press conference was an entertaining spectacle of Fed reporters repeatedly trying to extract forward guidance from a chairman who had just announced he was done giving it.
But critics have been too quick to accuse him of rejecting the now well-established principle that a modern central bank’s toolkit should include strategic communication. The evidence points in the opposite direction. After all, after his first meeting as Federal Reserve chairman, Warsh held a press conference, explained the Committee’s decision, described its view of the economy, reaffirmed the two percent inflation objective, and announced a series of task forces to examine the Fed’s communications, inflation framework, data practices, productivity analysis, and balance-sheet policy.
Instead of rejecting the idea that communication is an important central banking tool, Warsh is pulling the Fed back to what the literature actually supports.
The Origins of Fed Communications
The distinction matters because the economic literature on monetary policy communication is much richer than the current debate in the financial press suggests. The canonical figure here is Michael Woodford, the Columbia University economist whose work on monetary policy and expectations helped shape the modern view of central banking. At the Federal Reserve Bank of Kansas City’s 2005 Jackson Hole symposium, Woodford presented a major paper arguing that central bank communication is not mere public relations. It is part of monetary policy itself, because policy works largely through expectations about the future.
That insight is often flattened into the claim that the Fed should always provide forward guidance. But that is not what the literature says. Woodford’s core point was that markets and the public need to understand the central bank’s policy regime: its objective, its diagnosis of the economy, and the criteria likely to govern future decisions. The point was not that officials should constantly attempt to shape the market’s understanding of the likely path for interest rates.
The official response to Woodford at Jackson Hole came from Tiff Macklem, then a senior Bank of Canada official and later governor of the Bank of Canada. Macklem accepted Woodford’s basic premise that communication matters because expectations matter. But he drew an important practical distinction. Central bank communication, Macklem argued, should proceed in a natural order: objectives first, then strategy, then the central bank’s assessment of the economy and inflation outlook. The outlook for the future policy rate should come last and receive the least emphasis—if it is to be put forth at all.
That is because the policy rate is properly dependent on the state of the economy. A forecast about the path of rates necessarily follows from a forecast about the path of unemployment and inflation. Former Fed Chair Powell often insisted on this point, but it wasn’t clear whether this sank in. The projections were viewed as goals or even promises. Macklem warned against publishing detailed rate forecasts or trying to fine-tune market expectations about future rates. In his view, the central bank should make its strategy intelligible, not try to choreograph markets meeting by meeting.
That distinction is crucial for understanding Warsh. Central to Woodford’s argument was that the Fed should be clear about its inflation target. On that score, Warsh did exactly what the communicationists would have wanted: he reaffirmed the two percent objective and said the Committee was united in its commitment to deliver price stability.
The Financial Crisis and the Zero Boundary
The stronger academic case for explicit forward guidance emerged in a very different context: the zero lower bound. When short-term interest rates cannot be cut further, communication can become a substitute for conventional policy. This was the world of 2008 through the early 2010s—but it had its roots in the analysis of Japan’s response to a deep recession and a collapse of interest rates to near zero. The literature really begins with a 1998 paper by Paul Krugman and is carried through in subsequent work by Woodford, Lars Svensson, and other economists who argued for a strong form of forward guidance. The central bank might need to promise to keep rates lower for longer than it otherwise would—to promise to be responsibly irresponsible—even after the economy began to recover and even after inflation began to overshoot the target. The goal was to raise present demand by convincing markets and households that future policy would remain accommodative for longer than ordinary monetary policy would recommend.
That was the famous “Odyssean” case for forward guidance. Like Odysseus tying himself to the mast so he could hear the sirens without plunging to his death, the central bank binds itself in advance so that it does not give in to the temptation to tighten too early. Charles Evans made this argument explicitly in 2012, when he was president of the Chicago Fed, with his proposed unemployment and inflation thresholds, although he insisted on using the Latin name Ulysses in his mention of the story. “I would like to see our forward guidance take a different form—one that explicitly ties liftoff in the funds rate to observable economic outcomes (You can think of this as a Ulysses-type forward guidance: We tie ourselves to the mast to avoid the siren calls of premature tightening),” Evans said. Woodford’s follow-up paper that year pushed even further, arguing for state-contingent commitments tied to nominal spending or similar level-path targets. The point was not just to lash the central bank to the mast but to convince the market it was lashed.
(As an aside: Odyssean is a terrible name for this. Odysseus was a man of “many turns,” famous for being lethally unpredictable, habitually deceptive, and strategically cunning. You should not name a central bank commitment to stick to the script “no matter what” after him. That is not what Odysseus would do. Even when tied to the mast, he demanded to be set free and escaped a watery doom only because his sailors had plugged their ears and could not hear him.)
Vase depicting Odysseus tied to his ship’s mast listening to the songs of the Sirens, circa 480 BC, Athens. (Werner Forman/Universal Images Group/Getty Images)
Importantly, that was a zero-bound doctrine. It was not a permanent charter for the Fed to manage markets through dots, calendar hints, and a running narration of the future federal funds rate path. You can see how this could be confusing. During normal times, the Fed wants the market not to take its rate forecast all that seriously. But during a zero-bound crisis, it wants the market to take its rate forecast as carved into the stone table by the tip of a holy spear. That’s not an easy feat of persuasion for a central bank to accomplish. There’s a good argument that the best way to do it is to only provide forward guidance on rates during the crisis. That way, there’s less risk of markets looking at normal guidance as Odyssean or treating crisis guidance as a mere forecast.
Warsh’s complaint about the dot plot and the type of forward guidance the Fed has been habitually providing is very much in the Woodford-Macklem tradition. The dots are conditional, individual, weakly held forecasts. They are submitted, as Warsh put it, with “big erasers.” Yet markets and commentators inevitably treat them as guidance from the Fed. Warsh’s alternative appears to be regime communication rather than rate-path communication. He is not saying the Fed should stop talking. He is saying the Fed should stop talking so much and wean markets off the idea that Fed forecasts are guides to where rates will be next year.
This is much closer to the original communicationist literature than Warsh’s critics admit. The literature established that expectations are central to monetary policy. It did not establish that the Fed should permanently maintain an emergency-era apparatus of forward guidance after the emergency had passed.
The Fed’s post-crisis communications practices may therefore be less a triumph of academic economics than an institutional hangover. The tools developed for a zero-bound world became habits. The dot plot, forward guidance, and chair-centered market conditioning came to be treated as transparency itself. But transparency is not the same as rate-path choreography.
The Press Conference Communicated a Lot
Warsh’s first press conference is best understood as the beginning of an effort to unwind that confusion. He reaffirmed the price-stability objective. He described the economy as solid, with strong productivity and capital investment, job gains keeping pace with labor-force growth, and inflation still above target partly because of supply shocks. He emphasized that the Fed can look through first-round relative-price shocks but must prevent them from spreading into broader inflation. He also acknowledged that monetary policy may be restrictive in some sectors and less so in others, and that the balance sheet and interest rates may operate through different channels.
That is not yet a complete reaction function. But it was his first meeting. A Fed chairman cannot simply impose a new communications regime by personal decree, especially if the goal is to make policy less personalized and more institutional. The task forces themselves can be seen as a form of transparency and communication. They are the mechanism by which the Fed can decide—and publicly announce—what should replace the model designed for the zero bound.
If we’re right about Warsh moving toward something closer to what Woodford and the communicationists advocated, we should expect the next moves to come over the course of several months as he replaces rate-path guidance with clearer regime guidance. That means a better explanation of the Fed’s inflation objective, its treatment of supply shocks, its reading of productivity and potential growth, its use of market prices, and its distinction between rate policy and balance-sheet policy.
If he succeeds, Warsh will not have repudiated the communication revolution. He will have rescued it from the destructive habits left over from the global financial crisis.
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