The Fed goes schtum – will markets wobble?

Kevin Warsh is poised to unveil his new communications plan. He is going to give us the silent treatment.

The new Fed chairman gives his first interest rate call tomorrow at 7pm our time – a hold at 3.75%, we assume, though Warsh thinks that in future we should be much less certain about such assumptions.

For more than a decade, the Federal Reserve has aimed to be crystal clear about its direction of travel.

It wanted markets not to wobble in the face of uncertainty, so it told them what it was going to do before it did it.

The Bank of England behaved much the same. The idea was the central banks should be demystified, that with clear PR people might even be persuaded that they tried to operate in the best interests of most people.

Warsh says that’s over. He intends to be curt. The thinking is that markets knowing everything the Fed has planned has turned the financial system into a mirror.

People who matter spend too long checking what officials said and not enough looking at what is actually going on in the economy.

Warsh insists he isn’t aiming to mislead us. But nor is he going to correct us if we have read him wrongly.

“I don’t expect any of the change in communications to be about hiding the ball,” he said.

He just won’t signal if he’s going to shoot or not.

This change of approach might have merit, but it’s a funny time to be pushing such a principle, if that’s what it is.

No one was asking the Fed to go fuzzy.

US public debt is rocketing by trillions at a time. Presumably US debt remains among the safest investments in the history of the world, but why introduce doubt by talking less?

Lately, hedge funds have increased the amount of trading they do in government debt, looking to turn what ought to be boring – the bond market – into a dealing circus.

For the hedgies, uncertainty, however temporary, is good. More to scheme and trade on, more bets to place.

Warsh doesn’t think that’s a problem, or at least, it’s not his.

Perhaps there’s an opportunity here for the UK. If the Bank of England and the Treasury double down on being as open as possible, doesn’t that make our markets easier places to understand?

If the yield on 10-year UK debt is very easy to predict, while the US equivalent is going haywire, won’t investors favour us over them? The City over Wall Street?

It’s good to talk.

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Simon.english@roxhillmedia.com