SPY•Main U.S. indexes lose some steam: Dow up ~0.9%, S&P 500 edges green, Nasdaq off ~0.3%
Materials lead S&P 500 sector gainers; Comm Svcs weakest group
Dollar slips; U.S. crude down >1%; bitcoin rises; gold rallies ~4%
U.S. 10-year Treasury yield edges up to ~4.64%
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With the dust having settled on last week's Federal Reserve meeting, Torsten Slok, chief economist at Apollo, put up a defense for Chair Kevin Warsh's efforts to shake up communications from the U.S. central bank. However, he also gave the recently appointed chair a suggestion in his post-meeting research note.
Slok wrote that Warsh has been "unfairly criticized" for his decision to eliminate forward guidance on Fed policy moves, saying that it's not reckless. "It's pragmatic."
First, the economist argues that the lack of indications around whether the Fed will raise, cut or leave rates "stops policy inertia and restores real market signals." He says that rate commitments "lock the Fed into predetermined paths" and that this would make it "harder to pivot if conditions change."
Second, Slok argues that guidance "creates a false sense of predictability, which distorts asset pricing and encourages excessive risk-taking."
"The bottom line is that Warsh's logic is sound. Cleaner data signals are better than false certainty, and the Fed gains flexibility," he wrote.
But there is a but ...
While Slok agrees with the idea of leaving markets in the dark to some extent, he sees a cost in the form of higher volatility.
So, he suggests that Warsh could minimize this volatility by "providing clearer framework guidance." The one thing Warsh has not been shy about saying out loud is that he is serious about tackling high inflation and bringing it back to the Fed's 2% target.
But the central banker still threw the market into a frenzy by failing to provide any clues for what sort of things he believes he should do to reach this goal. For example, Slok asks whether Warsh could say loosely what he might focus on — whether it be higher rates, a smaller balance sheet or tighter financial conditions to reach the Fed's target.
In a conversation last week, hours before the Fed statement, Marta Norton, chief investment strategist at Empower, also gave Reuters some reasons in favor of Warsh's elimination of guidance.
"There are two things that have bugged me about the Fed decision-making and how the market reacts to it," Norton said. "One of them is this idea that instead of spending time trying to understand the dynamics of the economy, we're asking ourselves how will the Fed interpret it. It just makes it a kind of a derivative analysis."
She also pointed to a "recency bias" where the focus is on the most recent data rather than how it fits into longer-term trends. But with Fed funds futures showing some real investor confusion ahead of the meeting, Norton also showed some anxiety about the lack of guidance.
"Just tell me what you think. Like, stop being so coy and tell me what you think. It feels a little bit like a high school situation where you're like 'tell me who you like,'" she said. "It's like it's taken away the sugar. We want to know. We want to play around with this stuff in the markets, and you're not giving us anything."
