Warsh's Jobs Report Challenge: Can Markets Break Free from Predictable Reactions?

Kevin Warsh's new approach to monetary policy is set to face its first major test on Friday with the release of the latest jobs report.

The new Fed chairman has been working to change the relationship between the central bank and financial markets, encouraging traders to respond to economic data rather than trying to anticipate how the Fed will react.

This shift in approach is aimed at breaking a 'feedback loop' that has developed over years of forward guidance, where markets move based on what policymakers have said, rather than actual economic trends.

'When all the financial markets are doing is reflecting back what we've said,' Warsh argued in June, 'the Fed risks becoming blind to one of its most important sources of information.'

The jobs report will still be a major market mover, but investors will need to do more work to understand the implications. A strong payroll number could reinforce Warsh's confidence in the economy, but it also increases inflation pressure enough to change the path of monetary policy.

Warsh has argued that markets should discover prices rather than receive a running interpretation of monetary policy from Washington, returning some of the burden of judgment to investors themselves.