Warsh's Fed Abandons Data-Driven Approach for 'Touchy-Feeley' Policy

The Federal Reserve's decision to raise interest rates for the first time in three years has surprised many investors, despite futures markets pricing it in well beforehand. The rate hike, led by new Chair Kevin Warsh, suggests a shift away from data-driven decisions and towards a more 'touchy-feely' approach.

Warsh's disdain for forward guidance was evident in his keynote speech at the Jackson Hole conference in August, where he emphasized that markets should make their own decisions without fixed Fed commitments. This sentiment was reflected in his recent press conference, where he stated that precision forecasting may be out of vogue.

The median estimate of the long-run neutral rate has nudged to its highest level in 10 years at 3.2%, suggesting that the new Fed policy-rate midpoint of 3.875% is quite tight. However, Warsh dismissed the importance of this metric, stating that it has 'no operational effect on decisions that we make today.'

The upshot for many is that Warsh is trying to move towards a situation where policy assessment is more about assessing the look and feel of the economy at the moment rather than relying on absolutes and parameters.