Kevin Warsh Is Shifting the Future of the Fed in 1 Major Way -- and It Might Rattle Wall Street
Key Points
Kevin Warsh declined to give guidance for interest rates in the Fed's meeting last week.
Wall Street expects guidance, and the market often moves based on it.
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Kevin Warsh made his first entrance as Federal Reserve chair last week, and he's already changing things up. It has been the historical practice for the Fed chair to provide an outlook for the rest of the year so Wall Street and armchair analysts can try to anticipate how things will play out, but Warsh stepped back from that practice.
"I think financial markets perform best when they react to incoming data," he said. "I think the financial markets work less efficiently when they ask a question, 'How will the Federal Reserve react to that incoming information?'"
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As a result, he refrained from offering guidance about future moves and did not participate in the Federal Open Market Committee's (FOMC) "dot plot," which charts the committee's thoughts about the future.
Image source: Getty Images.
Wall Street loves guidance, and many stocks rise and fall based on it. But as Warsh notes, moving the stock market based on an unknowable outcome that's often wrong isn't very logical.
The market, however, is forward-looking. Investors aren't making decisions based on what happened, but rather on what they think might happen. Without the Fed's guidance, Wall Street is lacking one of its favorite talking points.
It's likely to create substitutes instead. The dot plot still exists, just without the major signatory. There are also all sorts of retail reports and forecasts that can be used, though the outcome is going to look different. It's also possible that the market does begin to work more efficiently if it's forced to work within a framework of what's known instead of what's guessed. The S&P 500 (SNPINDEX: ^GSPC) fell after the meeting, but it's already moving back up.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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