Former Fed Chair Ben Bernanke described how the Federal Reserve moved from a low-communication policy to an open-communication policy in his book, " 21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19."
Bernanke’s predecessor, “Maestro” Fed Chair Alan Greenspan, prided himself on being able to talk in such a convoluted way that it was almost impossible to figure out what he meant, much less bet actual money on it in the markets.
Bernanke changed this to clear forward guidance with the intent that clear information would reduce market volatility. Bernanke served as the 14th chairman of the Federal Reserve from 2006 to 2014.
Bernanke was Fed Chair during the Great Financial Crisis. Although the Fed maintained the “clear forward guidance” policy until today, I’m not convinced that the markets were less volatile with this policy than they were before.
New Fed Chair Kevin Warsh wants to reduce the communication from the Fed to the markets. This is only one of several changes he wants to make at the Fed for which he is setting up five panels. Warsh is the chair of the FOMC which has 18 other equal-weight voters. They won’t necessarily change decades of policy because this young whipper-snapper wants to.
Kevin Warsh Wanted a ‘Good Family Fight’ at the Fed. He’s Getting One.
The new chairman initiated a debate over how the central bank works, and it could test his tight-lipped approach on the economy
By Nick Timiraos, The Wall Street Journal, July 27, 2026
- New Federal Reserve Chairman Kevin Warsh’s tight-lipped approach to the economy and policy faces its first major test at this week’s meeting.
- Warsh established five task forces of outside experts to review how the central bank analyzes the economy and communicates its decisions.
- Federal Reserve governor Christopher Waller has questioned the usefulness of the task forces and Warsh’s quiet approach.
…
Last year, Warsh persuaded the most rate-cut-hungry president in modern memory to hand the central bank to him despite his long record of worrying about inflation. Now he faces another tricky sale: convincing his colleagues to abandon the intellectual habits of an economics profession he thinks led it astray.
The Fed meets again this week with an outcome that is unusually uncertain. Many expect it to hold rates steady, but a renewed inflation scare has put a surprise increase in play. Part of why it’s so hard to call is Warsh’s signature early move on Fed reform: He is saying less—about the economy, about where policy is headed, about his own thinking—and that silence is generating its own tension…
The five Fed task forces—on communications, its inflation framework, and its asset holdings, among others—are meant to reopen questions Warsh believes central bankers and the economics profession had stopped asking. The 15 people chosen to lead them include a Nobel laureate, former central bankers and business executives, and have drawn praise even from skeptics…
For Warsh, saying less is a virtue. It protects the committee’s judgment. If policymakers issue a forecast, they start crediting evidence that confirms it and discounting evidence that doesn’t. He also believes a quieter Fed gets a cleaner read on what investors think about the economy, rather than hearing an echo of its own guidance. Investors “are upset with me already that I’m somehow not feeding them all the information they’d gotten before,” he told lawmakers. “My message to them is, ‘Play the ball, don’t play the Fed.’”… [end quote]
Even with Fed guidance, the options market is continuously adjusting its opinion of the actions of the FOMC many months in advance. They use a lot of the same data the Fed uses, including data that I include in the Control Panel such as inflation, unemployment rates, GDP growth and financial movements in the Shadow Banking sector. Currently, the options market assigns a 70% probability that the Fed will keep the fed funds rate steady when the FOMC meets in two days and 30% that they will raise the fed funds rate. A fed funds cut is off the table.
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
The real economy is far more influenced by the 10 year Treasury yield than the fed funds rate. The 10-Year Real Interest Rate has fluctuated in a tight channel since 2022. It’s currently at the top of that channel and may break through resistance. A combination of growing government deficits, withdrawal of buying by trade partners (like China) and Warsh’s announcement that he wants his new task force to find a way to reduce the Fed’s huge balance sheet (which means selling Treasuries or letting them roll off the books as they mature) are all likely to increase long-term Treasury interest rates.
Both the bond market and the stock market will react. Will they be less volatile with less forward guidance from the Fed?
Only time will tell.
The short-term fed funds rate controls the cost of margin debt, which is at a record level of $1.5 Trillion (5% of GDP) and inflating the stock bubble. Margin eats away at accounts if the stock market plateaus and even worse if it drops. That can force margin calls and forced sales of good assets. This dynamic squeezes harder as the fed funds rate rises.
High-multiple growth stocks are significantly more sensitive to the 10-year Treasury yield than to the overnight fed funds rate. Their profits aren’t expected to grow significantly until the future. In a Discounted Cash Flow (DCF) model, a company’s theoretical value is the present value of all its future cash flows. Because of compounding, a 50-basis-point increase in a long-term discount rate slashes the present value of a dollar expected in 2038 far more aggressively than a dollar expected next quarter.
If speculators dust off their catcher’s mitts and “play the ball, not the Fed” they will realize that rising yields will puncture the bubble in two ways. Rising short-term rates will make margin more expensive and starve the greater fool of the means to buy more overvalued stocks. Rising long-term rates will make high P/E growth stocks less valuable since their future earnings will be discounted.
Wouldn’t everyone be happier with the crack cocaine of free money, like 2020 - 2022? Sorry, Fed meddling led to inflation. Warsh is determined to crush inflation. The speculators will provide plenty of volatility as they thrash around without Fed guidance, much less handouts. No Fed guidance. No Fed “put.” No Fed pacifier when the market has a tantrum.
The markets haven’t seen this for over 20 years. A whole generation of traders will need to learn how to see the ball, let alone play it.
Wendy