Warsh's No-Talk Policy Leaves Monetary Control in Financial Markets

US Federal Reserve chair Kevin Warsh has been criticized for his approach to monetary policy. He believes that the central bank should not explain its reaction function, which is how it adjusts policy in response to changes in the economy.

This approach, according to critics, would give control of monetary policy to financial markets. The author argues that if market participants do not understand the Fed's reaction function, they will make poor assessments of how economic data affects monetary policy.

This would lead to inefficient and less timely monetary policy, with financial conditions slower to adjust to future changes in policy. Moreover, without clear guidance from the Fed, policy expectations become muddled, causing confusion, greater volatility, and higher risk premia.

The author also points out that Warsh's approach threatens the Fed's credibility. The central bank's silence on its reaction function has already been evident in investor reactions to his press conference, where short-term rate expectations fell, while longer-term yields rose.