Warsh, rinse, repeat

Federal Reserve Governor Kevin Warsh has written an op-ed for today’s WSJ. He has some surprising things to say.

Judgments made by policy makers in the current period are likely to be as consequential as any made in the depths of the panic. That means policy makers should continue to communicate as clearly as possible the guideposts, conditions and means by which extraordinary monetary accommodation will be unwound, including the removal of excess bank reserves.

Today, even more than usual, we should maintain considerable humility about optimal policy. Financial market developments bear especially careful watching. They may impart more forward-looking signs of growth and inflation prospects than arithmetic readings of stimulus-induced gross domestic product or lagged composite readings of inflation.

The optimist in me reads this as wisdom. The pessimist reads that if you can manipulate the stock market, you can manipulate the Fed…

In this environment, market participants and policy makers alike should steer clear of ironclad policy prescriptions. Nonetheless, I would hazard the view that prudent risk management indicates that policy likely will need to begin normalization before it is obvious that it is necessary, possibly with greater force than is customary, and taking proper account of the policies being instituted by other authorities.

(emphasis added)

Jansen is all over this:

I have written here many times that I believe that the Federal Reserve will not raise rates as long as the unemployment rate is rising and the labor market is weak. That has been the traditional pattern of the Federal Reserve.

That has been one of the pillars of my macro view. I think the article by Warsh forces me to question that view.

It is interesting that it appears so near the conclusion of the FOMC meeting. I can not believe that he wrote and published this without the imprimatur of the Chairman and quite a few of his colleagues.

Carrying this logic through… Had the Fed wanted to deliver such a message to the markets, they had a perfect opportunity less than two days ago. But there was nothing even hinting at this in the statement. (In fact, Warsh is arguably saying the opposite.) A provocative piece by a single Fed governor, released on a Thursday night, smells like a trial balloon to me.

Follow-up from Jansen:

I have heard an interesting theory on the Warsh article.

A portfolio manager with whom I converse as well as an economist report to me that there has been a reasonable amount of speculation the Warsh would be leaving the Board in a reasonably short period of time.

The theory is that this is his valedictory address and that his departure will come sooner rather than later with its publication.

So there you have it. This is either a deliberate attempt by the Fed to make a statement without making a statement, or it is a parting shot from a governor not long for his job. Looking forward to finding out which.

Update

In New Speech, Warsh Elaborates on His Op-Ed (WSJ Real-Time Economics blog)

This is looking more like a deliberate attempt by the Fed to manage expectations.

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