Warsh's Silent Fed Leaves Markets in the Dark

Former New York Fed President Bill Dudley criticized Federal Reserve Chairman Kevin Warsh's decision to stop explaining how the central bank would react to economic data. Dudley argued that this lack of transparency has left monetary policy 'indeterminate' and made it difficult for markets to anticipate future actions.

The controversy arose after a benign July inflation report, which showed core inflation at 2.5% on an annualized basis, the lowest in more than five years. Despite the positive numbers, futures markets cut the odds of a September rate hike from around 60% to 45%. However, Dudley, who served as Fed president during the Great Financial Crisis, still sees a strong case for a hike.

Dudley cited three reasons: policy may not be restrictive, given that the federal funds rate has been at or above its current level for two years and full employment is intact; the long inflation miss, with prices running above 2% for five consecutive years; and the asymmetric risk of letting inflation expectations become unanchored.

Robin Brooks, a senior fellow at Brookings, disagreed with Dudley's views. He argued that the July inflation report was not a reason to tighten monetary policy, pointing out that the 'core core' measure was flat after a slightly negative prior month.