Warsh curbs Fed guidance; investors fear higher borrowing costs

Kevin Warsh, at his first Federal Open Market Committee meeting as Fed chair, narrowed the Fed’s public guidance on interest rates and declined to publish his personal projection on the Fed’s dot plot. The committee left its policy rate unchanged while issuing a shorter statement that removed language indicating whether officials were leaning toward future cuts or hikes.

Warsh described the changes as a “new chapter” in Fed communications and said internal task forces will review how the central bank communicates with markets. Those reviews could lead to further changes in public guidance or the eventual removal of dot plots.

Eighteen other FOMC members submitted personal rate projections on the dot plot. Market participants said omitting the chair’s projection reduces one reference point they previously used to assess the Fed’s likely path for rates.

Bond traders and portfolio managers warned that fewer explicit signals from the Fed could increase uncertainty about monetary policy. Several investors said reduced transparency may prompt market participants to demand higher compensation for policy risk, a shift that would tend to push Treasury yields and borrowing costs for governments, businesses and households higher. Some of those investors added that the full effect has not yet been reflected in bond markets because the Fed’s communications review is ongoing.

Warsh and his advisers argued that too much forward guidance can cause markets to focus narrowly on Fed forecasts and that reliance on detailed signals can amplify forecasting errors. Officials said restoring a degree of uncertainty would give the Fed more flexibility to respond to changing economic data without forewarning every policy move.

Views among market participants diverged. Some portfolio managers welcomed greater uncertainty, saying higher risk premiums could reduce speculative leverage and tighten financial conditions. Macro hedge funds that trade interest rates and currencies said a less predictable policy backdrop could create more trading opportunities.

Analysts noted the Fed’s communications approach has changed since 2012, when dot plots became a regular feature to show individual policymakers’ rate expectations. Warsh’s alterations mark a change from that period and begin a review of how much forward guidance the Fed will provide going forward.

Officials and investors said the communications review will continue, and markets will watch future FOMC statements and briefings for further shifts in how the Fed explains its policy outlook.