La Jornada: The new head of the Fed reveals a sober monetary policy

Washington. The new chairman of the United States Federal Reserve (Fed), Kevin Warsh, quickly left his mark on the job: in his first monetary policy meeting that marked a return to a simplified central banking model, in the style of the 1990s, before the crises of this century placed the Fed at the center of the stage of economic management and turned its leader into the “comforter-in-chief” for both Wall Street and the middle class.

The question now is whether the reduced role he seeks for the Fed – and, in practice, for himself – is compatible with an increasingly complex world, a more intense and polarized information environment, and markets already accustomed to a constant diet of comments from the main monetary leaders.

Regardless of whether it was his intention, Warsh’s emphasis on inflation during Wednesday’s press conference, without any more nuanced commentary on what might meet the threshold for a rate hike, led investors to conclude that a hike is coming soon and to start pushing bond yields higher.

The market reaction “was amplified by Warsh’s press conference, which “combined a hawkish—almost exclusively mandate-focused—emphasis on the need to ensure price stability with a complete absence of any nuanced analysis of the Fed’s strategy or response function,” wrote Krishna Guha, a former senior communications official at the New York Fed and currently vice president and head of economics and central bank strategy at Evercore ISI.

In Warsh’s first meeting as head of the Fed, he kept interest rates stable in the range of 3.50 and 3.75 percent, where they have remained since December, announcing it in a brief monetary policy statement, reminiscent of those of the 1990s by then-president Alan Greenspan, famous for his reluctance to reveal his way of thinking to the public. Warsh did not want to let it be seen that those responsible for monetary policy are mostly inclined towards the probable need for rate increases this year.

Concise statements don’t necessarily mean clear, either, and some of the changes raised as many questions as they answered about the Fed’s new era. Instead of the simple factual statement that “inflation is high” used under former Chairman Jerome Powell, for example, Warsh’s first statement was conditional, stating that inflation was high “relative to the 2 percent target.”

The Fed has a dual mandate, to keep inflation under control and promote job growth. In this sense, the new statement takes another comparative twist by stating that the increase in employment has “kept at the same pace as the workforce.”

This language appears to sidestep the “curious” balance Powell’s Fed observed while debating how the Trump administration’s crackdown on immigration had altered the number of jobs needed to keep the unemployment rate stable. Warsh did not elaborate on it.