Markets want more information from the Fed chair and less interference from the Treasury secretary.
That’s the message from the Jackson Hole special edition of the CNBC Fed Survey. Of the 31 respondents, 80% said the Fed chair should provide more insight into his economic views. However, respondents are split 48% to 48% on whether he should take a position on the outlook for interest rates.
“Given the sharp rise in long-term interest rates and the high degree of uncertainty surrounding the path of inflation and the Fed’s ability to respond going forward, Chairman Warsh’s speech will be extremely important,” said Kathy Bojancic, chief U.S. economist at Nationwide.
Warsh is scheduled to give his first keynote address Friday at the Fed’s major annual conference in Jackson Hole. Since taking office, he has launched a new communications system in which he is less vocal about his views on the economy and policy outlook, in a break with his predecessor.
Mr. Warsh said he was refraining from speaking because he wanted a clearer picture of market prices, unfiltered by the Fed’s guidance.
A plurality of respondents think he will continue this practice, with 45% expecting him not to provide any guidance on the interest rate outlook in his Friday speech. But 32% think he will be somewhat hawkish, and 19% think he will be neutral.
“By avoiding forward guidance, Mr. Warsh threw out the baby with the bathwater,” said Constance Hunter, chief economist and head of research at The Economist Enterprise. “He has abandoned the role of communicating about reaction functions, and that communication now comes from meeting minutes and speeches from other FOMC members.”
best efforts appear to have failed
Ironically, Treasury Secretary Scott Bessent appears to have made it harder for Mr. Warsh to get a clearer view of the market. Last week, the Treasury Department announced a surprise increase in purchases of long-term outstanding securities, which many believed was an effort to keep bond yields in check. However, 77% believe this effort will not be successful.
“I think the Treasury is complicating the Fed’s job by bringing forward the issuance of T-bills further,” said Peter Boockvar, chief investment officer at One Point BFG Wealth Partners.
“The administration’s efforts to lower long-term interest rates are facing headwinds caused by the Iran war, large budget deficits, and turmoil over the Fed’s monetary policy management,” wrote Mark Zandi, chief economist at Moody’s Analytics.
“Treasury’s actions are at best a band-aid, and at worst a sign of panic,” said Gregory Daco, chief economist at Parthenon EY.
The widespread view that the Treasury’s measures are ineffective is evidenced by the 10-year bond yield, which is expected to remain in the 4.60-4.70 range until the end of next year.
When asked why bond yields have risen, the average respondent said 37% attributed it to increased global bond supply, 28% to higher expected inflation, 21% to higher Fed interest rate expectations, and 19% to improved growth prospects.
Interest rate outlook
On the eve of the Jackson Hole symposium, respondents were more divided than usual on the outlook for interest rates. For next year, 53% expect interest rates to rise, 30% to cut, and 16% to remain unchanged.
Next year’s inflation rate is expected to be 2.6% year-on-year, down from this year’s 3.4%, the unemployment rate is expected to remain stable at around 4.3% until 2027, and GDP is expected to remain at a level slightly above 2%. But some believe the decline in inflation is due to the Fed’s interest rate hikes.
The survey’s disagreements about the outlook for interest rate policy are reflected in the Federal Open Market Committee, which sets interest rates. In July, the committee voted 9-3 to keep interest rates on hold, with three votes in favor of raising rates by a quarter of a percentage point. According to federal funds futures, the probability of a rate hike in September is 40%, rising to 70% by December.
By contrast, 46% of respondents expect at least one rate hike between now and December.
As top policymakers gather in Jackson Hole, Mr. Warsh could spark the family feud he hopes to bring about the “regime change” he promised to bring to the Fed. Respondents are split 40% to 40% on whether a majority of the FOMC supports Mr. Warsh’s view on the need to reform the Fed’s inflation framework. Thirty-eight percent of respondents believe Mr. Warsh has majority support on the need for balance sheet reform, while 31% say he does not. Additionally, 47% think Mr. Warsh has majority support on communications reform, while 30% think he does not. Still, since Mr. Warsh took office, Fed officials have not been shy about revealing their outlook for the economy and interest rates in speeches and interviews with the press.
Still, 65% of respondents agreed with Warsh that the Fed could benefit from speaking less and getting a more unfiltered view of market signals about the direction interest rate policy should take.
“We support the chairman’s goal of improving and modernizing the Fed’s operations,” said John Donaldson, director of fixed income at Haverford Trust. “The process will be evolutionary rather than revolutionary.” It won’t happen overnight, but it will take some time to get everything up to date. ”
