The Reaction Function Fundamentalists Are Lost in a Maze of Mirrors
Yesterday, we argued that Federal Reserve Chairman Kevin Warsh should resist demands that he publicly articulate the Fed’s monetary-policy so-called “reaction function.” But since many of Warsh’s critics persist in their errant views, it’s worth expanding on that argument.
Although Warsh’s critics say they accept the idea of dropping forward guidance, calling what they want a “reaction function” does not change what is really being demanded. What they want is actually state-contingent forward guidance, a description of how future economic developments will translate into future interest-rate decisions.
The strongest attack on Warsh’s approach comes from Bill Dudley, the...
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