Warsh Ends Forward Guidance, Forces Market to Face Uncertainty

The Federal Reserve has been offering guidance to investors through forward guidance since the dot-com bubble. This guidance continued during the Great Recession, with the Fed providing explicit guidance to stabilize the bond market and US economy.

New Fed chair Kevin Warsh believes that this guidance needs to end, forcing the market to figure things out on its own. Forward guidance is already gone, and there are hints that the number of meetings the Fed holds could be trimmed.

Warsh commented that 'Market participants are learning to play the ball, not the referee.' This refers to the rise in bond rates between the last two Fed meetings, which Warsh believes is a good outcome. Investors reacting to real-time market changes can put guardrails in place without a Fed put and explicit guidance.

The lack of guidance may increase short-term volatility, but it's how the market has historically operated. Investors assess risks and rewards and place bets on the future. The Fed will be there to make adjustments if needed.