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Bank of America questions Kevin Warsh's Fed reaction function clarity
After Warsh took over as Fed chair, the July meeting kept the federal funds rate at 3.50% to 3.75% in a 9-3 vote, while economists say markets lack a clear trigger framework for future policy changes.
Bank of America has warned that the Federal Reserve under new chair Kevin Warsh is not providing enough clarity on what would drive changes to policy, arguing that the approach could effectively act like a tax on the economy.
In June, Warsh signaled a desire to reduce the Fed's reliance on forward guidance, saying it is not well suited to the current economic environment, and he has also launched a broader review of how the Fed addresses inflation and monetary policy.
At the Fed's July meeting, policymakers voted 9-3 to keep the federal funds rate at 3.50% to 3.75%. The article says Warsh declined to signal what the Fed might do next, pointing instead to the rise in bond yields since the prior meeting and noting that policymakers would act when necessary.
Bank of America frames the issue as the Fed's reaction function, describing it as how policymakers respond to shifts in inflation, employment and other indicators. The piece says economists want more detail on which inflation measures Warsh is watching, how he defines underlying inflation, and how far inflation can deviate from the Fed's 2% target before policymakers feel compelled to respond.