Analysis: US Market Still Adapting to Warsh Rules

Kevin Warsh wasted no time making his mark on the Federal Reserve in his first meeting as chairman.

The central bank released, this Wednesday (17), a more concise statement on interest rates; Warsh chose not to include his own prediction in the so-called "dot plot"; and, in his press conference, announced the creation of five new working groups to promote even more changes.

This is all part of his plan to change the way the Fed communicates with the outside world - a big change from the central bank's more recent style.

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"It is clear that Chairman Warsh plans to run the Fed differently than Wall Street has become accustomed to over the past eight years (under Jerome Powell)," said Bret Kenwell, US investment strategist at eToro, in a note. "Investors will adapt, but there may be some teething difficulties along the way."

Markets are still trying to understand what this means - and how to act on it.

"With the new sheriff in town... markets are analyzing everything, every detail," said Brett Ryan, senior U.S. economist at Deutsche Bank, ahead of the meeting.

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Stocks fell, short-term bond yields soared and the US dollar strengthened after the meeting on Wednesday. Yields on two-year U.S. Treasury bonds rose to their highest levels in more than a year after nine Fed members indicated that a rate hike by the end of the year is justified.

Even before taking office, Warsh had signaled his preference for more discreet communication from the Fed. He said one of the working groups he announced on Wednesday will focus on communication.

"I think financial markets perform best when they react to emerging data," Warsh said. "I think financial markets work less efficiently when they ask themselves, 'How will the Federal Reserve respond to this information as it comes out?'"

All of this could lead to a period of instability in the markets for some time as traders learn to understand Warsh's views on inflation, the economy and the institution he leads, analysts noted.

"Markets will have to get used to a difficult transition to the new Fed era," said Krishna Guha, vice president at Evercore ISI, in a note.

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Warsh takes over as Fed chairman with stocks near all-time highs, bond yields above pre-war levels with Iran, rising inflation and a job market that appears to be stabilizing.

Treasury yields have risen in recent months due to rising oil prices and expectations that central banks will need to keep interest rates stable or even raise them to contain a resurgence in inflation. In April, the Fed's preferred inflation gauge hit its highest level since 2023.

Investors will be watching to see if Warsh's Fed can contain inflation. Meanwhile, markets will look for more information on the president's proposed changes.

"Are these task forces agents of regime change or just more commissions to reheat old debates?", asked Michael Feroli, chief US economist at JPMorgan Chase, in a note. "Presumably we'll know more in the coming weeks."

Source: CNN