The Future of Forward Guidance Under Fed Chair Warsh

[00:00:00] Speaker 1: Torsten Slock of Apollo writing with geopolitical risk easing and Fed chair Kevin Warsh focus on simplifying Fed communication. The number of words in the FOMC statement can move down to levels seen under Alan Greenspan. Torsten joins us now. OK so a statement comes out. Do I need to read it first or just do a quick word count. [00:00:19] Speaker 2: We certainly need to read it first because the key issue here is of course what style of communication are we going to get. And in particular what is the forward guidance. Is there any forward guidance. Is he going to say that we do not like forward guidance. This is still a very very unclear area in terms of what is the communication style and what is Kevin Warsh going to do in terms of what is he going to say at the press conference. [00:00:40] Speaker 1: Former Fed Governor Betsy Duke was just on with us and she was talking about how there could be a complete rewrite of the statement not just a little tweak of the easing bias. Is that what you're expecting as well. [00:00:51] Speaker 2: I think that is something that we should expect as one of the outcomes. We just don't know. So that's the reason why the market of course has been used to having very well anchored expectations around the dot plot. The dot plot has been around now for 15 years almost. The ACP meaning the forecast was around for almost 20 years. So most people in financial markets have grown up with very anchored expectations about the economic outlook and very anchored expectations about what the Fed will do. And this discussion about is there an anchor. Is there not an anchor. Of course it's good to have an anchor in the sense that that's clear then we everyone knows where we're going. But at the same time if the world changes then it's not good to have an anchor. And this is the debate up on the scale. Namely do we want to have an anchor or do we not want to have an anchor. [00:01:31] Speaker 3: That will give more flexibility to the FNC. In this very moment if we remove some of that and we remove some of the forward guidance. Does that not all things considered make us a little bit more hawkish because we don't have that residual easing bias that had been there before. [00:01:45] Speaker 2: Yes and it's particularly important if we begin to think about the discussion around rates because Kevin Walsh has also been focusing on shrinking the balance sheet and a compromise could potentially be that well we're not going to change much communication on rates but maybe saying that the balance sheet will be smaller is implicitly also going to be a tightening of policy. So it all depends on where the committee stands and where they discuss today and what their outcomes is in terms of how should they communicate. How are they going to signal to your point Danny that there is still some problems with inflation being too high. We still have a very strong labor market which all argues for that the Fed should be tightening financial conditions. [00:02:20] Speaker 3: Do you think this is a chair Walsh who will want to sort of galvanize a consensus as Powell had and how challenging will that be if so if he does want to implement something in his words of a regime change for the Fed. [00:02:33] Speaker 2: Kevin Walsh knows what he is doing but I think what is a very important challenge of course for him is that if he wants any changes basically he needs to have the other 11 members on the FOMC the voting members on board with whatever he wants to change. So that's why it must be clear also for him he needs to get them on his side in terms of any decision made because always decisions about not only rates also about QE QT whatever needs to be changed in terms of policy there are 12 voting members and they vote about what do they want to change and therefore they're not going to change. The number of dissents also potentially becomes important when we get the statement tomorrow. Do you think we get less Fed speak then with a Kevin Walsh as the Fed chair. Well that's really challenging because telling the regional Fed presidents that they're not allowed to talk more even the governors that they're not allowed to talk more. That's just not possible. And given we have had a history now of a lot of communication that means also the market has been putting more weight on the Fed chair. [00:03:25] Speaker 1: And I think the market will continue to put most weight on the Fed chair. And don't you think we've seen more of this robust debate and communication because of Steve Myron who was a Trump appointee. [00:03:34] Speaker 2: So it would be pretty odd if Kevin Walsh came in and said actually stop talking as much. Yeah because we've also had some of course to your point here we have some quite diverging views in terms of the dot plot. And this is of course also why the dot plot creates sometimes a bit more confusion. Yes it may be anchoring expectations but the standard deviation of those expectations also get a lot of attention. In other words how divergent are the views in terms of what's going to happen in the future. And we don't know which dot is the Fed chair dot. So that also makes it more complicated in terms of the dots coming out actually going to be helpful in the sense of anchoring expectations or do they raise more questions about the uncertainty of what is the disagreement on the committee. [00:04:12] Speaker 1: There's also a debate right now whether or not Kevin Walsh puts a dot on the plot. [00:04:16] Speaker 2: Yeah because he could also decide to this would be highly unusual of course that we'll of course decide he could decide to say I'm not going to put in a dot. He could also decide to say I'm not going to submit my ACP forecast meaning his forecast for he thinks the economy is going. That would be pretty dramatic. So if the goal here for him remember the most important job for the future is really to create consensus about a decision. All books written by previous fed chairs they all emphasize that a key part of the job is to basically call around to all the voting FOMC members and also the non-voting members and say what do you think should be the outcome of this meeting. What is your view and try to come up with some solution and try to come up with some path where he can get a majority and ideally a big majority for the decision that they're going to take. [00:04:56] Speaker 3: It's complicated. But does this week's news on Iran a deal a memorandum of understanding being signed on Friday make things less complicated for Fed chair Walsh. [00:05:04] Speaker 2: Absolutely. Because one key issue was that inflation is still at roughly three percent in core PCE and core CPI. And the problem is when inflation is three and the Fed's target is two. Then now we have at least one good news is of course that we have energy prices coming down. But we still have a fairly strong economy getting tailwinds from the AI boom getting tailwinds from the one big bill of a bill. And we also at the same time have upward pressure on inflation from tariffs still hanging over and putting upward pressure as several Fed posts have been suggesting. So the key answer to your question is he absolutely is absolutely helped. He's helped by the fact that energy prices are moving low. [00:05:36] Speaker 3: Yeah he's helped. But again to your point tourists and there's inflation coming from other parts of this economy. So if he wants to lean more dovish if he wants to kind of like fulfill the promise that he had been talking to you from Trump. [00:05:48] Speaker 2: What points of this parts of this economy can he point you to say we can still get a cut this year. Yeah. And the double edged sword is of course that when energy prices go down then we spend less money on energy and we spend more money on something else. And given that literally all high frequency indicators are still very strong still very strong data from the TSA. How many people travel in airplanes still very strong data on the weekly data from Redbook and how many people are consuming stuff at Walmart and Target and TJ Maxx. And we also have still very strong data when it comes to hotel demand on a weekly basis. So that just is very little signs that no signs essentially at this point of the economy slowing down. So too high inflation strong labor market that argues of course for the Fed needs to move towards a more hawkish stance.