Warsh, the Fed and Market Signals

Kevin Warsh is settling into his chairmanship of the Federal Reserve, and his message after this week’s Federal Open Market Committee meeting is that he sees early signs his method is working. He has an interesting point about market signals.

The FOMC kept its Fed funds rate target range in place again, at 3.5-3.75%, although with three dissenting votes in favor of an increase. It’s hard to second-guess that decision given a confusing environment that includes recent signs of slowing inflation but also the prospect of more energy-price shocks, the artificial-intelligence revolution and shifting tariff policies. The dissenting votes signal healthy debate about these matters.

His post-meeting press conference also was enlightening, even without “forward guidance” about Fed intentions. One important message is that the Fed’s inflation target is 2%, and not a little over 2% or any percentage rate that starts with a 2. It’s an important marker for Mr. Warsh to lay down, since the Fed periodically faces the temptation of outside economists arguing it should fudge the target.

Mr. Warsh also suggested his no-forward-guidance policy is working. Since his first meeting as Chairman in June, investors have had to relearn how to price risk themselves without being steered by the Fed. One result has been that bond yields are rising across the duration curve. Another is that the dollar has appreciated modestly.