Warsh Urges Markets to Break Central Bank Guidance Habit

Federal Reserve Chairman Kevin Warsh is urging markets to stop relying on central bank guidance and start independently interpreting economic data. He wants investors to make their own minds about interest rates, rather than waiting for the Fed's signals.

In a speech at the Jackson Hole Economic Symposium, Warsh noted that business capital expenditures are rising rapidly and labor markets are consistent with full employment. However, he emphasized that this doesn't mean an aggressive hiking cycle is on its way.

The market has grown accustomed to relying on central bank guidance to determine interest rates, but Warsh wants investors to focus on real information and draw their own conclusions. He cited the example of Japan, where inflation has risen above target, prompting the Bank of Japan to raise interest rates five times in four years.

The US now spends more on interest payments than on defense, with annual interest expense reaching a record 18.5% of federal government revenue. However, Warsh believes that growth can provide relief from this situation, and that higher interest rates are not only rational but also necessary for a high-growth economy.

Warsh is trying to break the paradigm that stock markets can only rise when interest rates fall. He wants investors to accept that a hawkish Fed can coexist with a booming economy and buoyant stock markets, and may even welcome higher US yields as a natural consequence of growth.