Federal Reserve's new Chair Powell's debut: Will he abandon interest rate forecasts?

Author: Wu Yu, Jintou Data

After Kevin Warsh becomes Chair of the Federal Reserve, his first major test will arrive in June. The interest-rate expectations (dot plot) released at the June 16–17 meeting of the Federal Open Market Committee (FOMC) will spell out his policy tilt to U.S. President Trump and global markets.

At the core of this tilt is whether Warsh will submit his own interest-rate forecast. As the Fed chief personally selected by Trump, he can choose to abstain—allowing him to conceal his true position early in his term, especially since Trump has made it clear he wants to lower borrowing costs.

Former St. Louis Fed President and current Dean of the Mitch Daniels School of Business at Purdue University, James Bullard, believes this is a strategic choice for Warsh. With only five weeks left before the June meeting, Warsh’s swearing-in process is still underway. “He may simply say there isn’t time to submit a forecast this time.” Warsh was confirmed by the Senate on Wednesday and still awaits White House approval and his swearing-in.

Warsh’s position can also be judged by comparing him with the soon-to-depart Federal Reserve governor, Stephen Miran. Miran holds the seat that Warsh is expected to take over. Since taking office in September last year, his interest-rate forecasts have consistently been far below those of his colleagues, and he has been a steadfast supporter of aggressive rate cuts.

Miran will leave office when Warsh is sworn in. If Warsh does not submit a dovish dot plot that deviates from the consensus, he will be grouped with the mainstream Fed thinking that Trump has repeatedly criticized. But if he does submit one, it could also spark questions about White House control and the loss of independence.

In fact, it is not without precedent for Federal Reserve officials to refrain from submitting interest-rate forecasts. During Bullard’s tenure, he stopped providing long-term forecasts, arguing that forecasts beyond two to three years would mislead the public and damage the Fed’s credibility.

In March 2020, when the COVID-19 pandemic broke out and parts of the economy stalled, the Fed also temporarily halted all economic and interest-rate forecasts altogether, because at that time even short-term forecasts had little practical meaning.

This choice also aligns with Warsh’s consistent philosophy. He has long disliked providing “forward guidance” on future policy, and believes that disclosing too much information in advance can tie policymakers’ hands.

Starting in 2007, the Fed gradually expanded the range of quarterly forecast disclosures by officials. In 2012, when interest rates were near zero, interest-rate forecasts were added. At the time, the Fed believed that forward guidance was crucial for clearly exiting the “zero lower bound.”

But during periods when the economy is operating normally, many Federal Reserve officials agree with Warsh’s view: the interest-rate expectations in the Summary of Economic Projections (SEP) are prone to being misconstrued by markets as “commitments” for policy, rather than as up to 19 independent forecasts based on different assumptions.

Ellen Meade, a former senior advisor to the Federal Reserve and now a professor of economics at Duke University, said that Warsh will most likely push for reform of the SEP, and may combine delaying the publication of his first interest-rate forecast with that reform.

“He can easily decide that early on in his tenure in June, there’s too much on his plate, so why cause trouble for himself with the dot plot?” Meade said. Warsh might even encourage colleagues to postpone the SEP release, setting a timetable for corrections that effectively forces reform.

For Warsh, this is a double game. Submitting a dovish dot plot would trigger an independence crisis; submitting a mainstream dot plot would fall short of Trump’s expectations; abstaining could also lead to sharp market volatility due to policy uncertainty.

The “no forward guidance” era championed by Warsh may well be officially kicked off by an incomplete dot plot at the June FOMC meeting.