Warsh's gamble: A quieter Federal Reserve could mean volatile markets,
higher rates
[June 22, 2026] By
CHRISTOPHER RUGABER
WASHINGTON (AP) — The Federal Reserve has for decades moved steadily
from a remote, opaque government agency that shared little about what it
did or why to a more transparent institution willing to explain how it
makes decisions and what it thinks about the economy.
But in his first press conference Wednesday, new chair Kevin Warsh began
to reverse some of those steps. Warsh, like many economists, thinks the
financial markets have become too dependent on Fed guidance, and that
such direction is more effective in financial crises or economic
downturns.
Warsh quickly made changes: The Fed's statement on its interest-rate
decision was slashed to 132 words, from 341 in April. And Warsh
pointedly noted that the statement excluded any hints, or “forward
guidance,” about what the Fed's next moves might be.
In short, Warsh rapidly delivered on a promise to slash the Fed's
communications, particularly the guidance it gives to financial markets
about its next interest-rate moves. Yet such an approach carries the
risk of more violent swings in stock and bond prices, analysts say, and
ultimately could lead to higher interest rates for consumers and
businesses.
“Forward guidance in general has served to suppress volatility and
anchor market expectations,” said George Pearkes, global macro
strategist at Bespoke Investment Group. “And that has led to lower
borrowing rates, relative to alternatives.”
Still, the impact on consumers is likely to be modest, Pearkes added,
with mortgage rates perhaps a quarter-point higher than they would be
otherwise.
Financial markets see-sawed, then fell Wednesday after the statement and
news conference. The yield on the 10-year Treasury, which strongly
influences mortgage rates, jumped Wednesday to 4.49% from 4.43%, though
it fell back in Thursday trading. The yield on the 2-year Treasury,
which closely tracks expectations for Fed action, was 4.16% Thursday, up
sharply from 4.05% before the Fed's meeting. The broad S&P 500 stock
index dropped 1.2% Wednesday.
Warsh may be headed back to 1990s
Such swings could be a sign of things to come. Previous chairs have
signaled the Fed's next moves clearly enough that financial markets have
largely anticipated the central bank's actions. But Warsh has frequently
cited as a model former chair Alan Greenspan, whose circumspect comments
often kept investors guessing.
Greenspan, who served as chair from 1987 to 2005, did usher in the
statement the Fed now issues after each meeting announcing its decision.
The first statement was issued Feb. 4, 1994, and said the Fed would
increase its key rate for the first time in five years. The move caught
investors off-guard and the Dow Jones Industrial Average plunged 2.4%
that day.
The paring back of Fed communications is part of a larger package of
potential reforms to the central bank's operations that Warsh signaled
Wednesday. He announced that the Fed will set up five task forces to
examine the Fed's communications, its balance sheet, how it analyzes and
gathers economic data, the impact of AI on productivity and jobs, and
the frameworks it uses to analyze inflation.
Warsh said the communications task force would consider changes to the
quarterly economic projections the Fed issues as well as look at other
recent innovations, including press conferences. Former chair Ben
Bernanke was the first to hold them, though he did so only after every
other Fed meeting. Warsh's predecessor, Jerome Powell, shifted to
holding them after every meeting.
Such steps are a sharp contrast with the 1990s, when Greenspan never
explained a Fed decision, on the record, to reporters. Warsh could
ultimately dial back some of the Fed's increased transparency.
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Federal Reserve Chair Kevin Warsh's press conference appears on
screens on the floor of the New York Stock Exchange, Wednesday, June
17, 2026. (AP Photo/Richard Drew)
 “This is a big change in how the Fed
has conducted itself since the (2008-2009) global financial crisis,”
Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said.
"Since then there has been a one-way train to greater communication,
more transparency, and more forward guidance. Warsh has now put that
train in reverse.”
Fed chairs have seen benefits to forward guidance
Previous Fed chairs, starting with Bernanke, have seen a clear
benefit to more communication: It helps guide the markets in the
direction the Fed wants. Fed officials control a short-term interest
rate, but the rates that affect the economy — such as the yield on
the 10-year Treasury — are heavily influenced by investors'
expectations for inflation and economic growth. By telegraphing
their next moves, policymakers can cause those longer-term rates to
change even before the Fed adjusts its own benchmark rate.
Yet Warsh's view is that financial markets have become too dependent
on Fed guidance. Instead, he wants investors to gauge where the Fed
may move next by examining economic data and making their own
judgments, which the Fed can then consider as part of their
assessments of where the economy is headed.
“Financial market prices are probably the most important source of
information to guide central bankers,” Warsh said at Wednesday's
news conference.
Guidance can help with unexpected events
David Andolfatto, an economics professor at the University of Miami
and former economist at the St. Louis Fed, said he agreed with Warsh
that forward guidance has flaws. It can be easily upended by
unexpected events, he said, such as Russia's invasion of Ukraine or
the Iran war.
But the chair should set out guidelines for how the Fed will react
to unexpected events, Andolfatto said, or to challenges such as the
persistent inflation it is grappling with now, yet Warsh so far
hasn't done so.
“I’m with him on dispensing with forward guidance, but you have to
replace it with a contingency plan,” Andolfatto said. “It's not
enough to say, trust me, we'll keep inflation at target.”
Ironically, Warsh's decision to drop forward guidance may empower
the other 18 members of the Fed's rate-setting committee, Pearkes
said. Those officials — six members of the Fed's governing board,
plus the presidents of the 12 regional Fed banks — frequently give
public speeches, and their remarks will get even more attention as
financial markets seek clues about what the Fed may do next.
A big challenge to Warsh's approach will come if there is a sharp
financial downturn or economic crisis, as occurred during the COVID
pandemic. In those circumstances, economists said, forward guidance
can play an important role calming markets.
“Whether it will stand the test of time and he will behave this way
for five years is a very different question, but one that we're
going to have to wait for events to unfold to get an answer to,"
Pearkes said.
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