Federal Reserve communications are likely to become shorter, less reliant on forward guidance and more focused on longer-term economic narratives under new Chair Kevin Warsh, Deutsche Bank analysts wrote, as the central bank reviews how it communicates monetary policy.
Deutsche Bank wrote that Warsh’s newly announced communications task force is likely to produce “notable innovations” beginning next year, with most of its work expected to be completed by the fall and recommendations potentially finalized by year-end.
They believe that Warsh’s first Federal Open Market Committee meeting signaled a preference for “regime change rather than incremental adjustments” to how the Fed communicates policy.
Among the changes Deutsche Bank expects are shorter post-meeting statements that omit forward guidance and detailed descriptions of the Fed’s policy reaction function. The bank wrote that Warsh’s streamlined statement following the June FOMC meeting is likely to become the standard during his tenure.
Deutsche Bank also wrote that meaningful forward guidance is unlikely under Warsh, citing his long-standing criticism that such guidance has little role outside periods when interest rates are near zero.
The bank expects the Fed to retain its Summary of Economic Projections but potentially reform or eliminate the closely watched “dot plot,” replacing it with central tendency forecasts for the federal funds rate to reduce markets’ focus on individual policymakers’ rate projections.
While Deutsche Bank believes press conferences after every FOMC meeting are likely to continue, it wrote that their content will change, with less emphasis on recent economic data, near-term policy signals and the Fed’s reaction function, and more focus on broader economic themes.
The bank also wrote that although Warsh may seek to reduce the volume of public remarks from Fed officials, regional Federal Reserve presidents are likely to continue speaking regularly because of their responsibilities to local constituencies and concerns about preserving the central bank’s independence.
Deutsche Bank concluded that Warsh’s leadership could usher in a meaningful shift in Fed communications, reversing some of the post-financial crisis expansion in transparency while highlighting flexibility and longer-term policymaking.
