Federal Reserve chair Kevin Warsh wants the central bank to say less about where the economy is headed. But one prominent economist argues that the approach could hurt the U.S. economy by leaving financial markets in the dark about the Fed’s next moves.
Last week, Fed officials voted 9-3 to keep interest rates unchanged in the range of 3.5% to 3.75% for the fifth time in a row. The three dissenting voices came from regional bank presidents who favored a quarter-point rate increase to address energy supply shocks that have pushed up gasoline prices and the cost of a range of other goods.
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At a news conference following the conclusion of the two-day meeting, Warsh declined to say what conditions would prompt the Fed to raise interest rates. Financial markets swiftly reacted, sending the yield on the 30-year Treasury bond to 5.22% — its highest level since 2007.
That has prompted several analysts to warn that the Fed could face backlash from investors that may threaten the broader economy.
“There is a new potential threat to the economy – a serious mistake by the Federal Reserve,” Mark Zandi, chief economist at Moody’s Analytics, wrote in an X post. “I’m not concerned about the Fed’s decision to keep rates unchanged. My concern is that policymakers are unwilling to provide even a modicum of forward guidance — or a broad sense of their reaction function.”
‘More volatility in bond and stock markets’
Zandi said the Fed’s reluctance to guide Warsh will leave investors guessing about its strategy to combat inflation and “repeatedly wrong-footed.”
“That means more volatility in bond and stock markets, which is likely already reflected in a larger term premium, rising long-term interest rates, and a wobbly equity market,” Zandi said. “If the Fed continues down this increasingly opaque path, a future meeting could trigger a serious market sell-off — putting the broader economy at risk.”
Stocks fell while bond yields climbed after the Fed concluded its meeting last week.
Economists at Bank of America also warned that traders could begin treating the Fed more like the central bank of a developing economy struggling with credibility issues.
“A steeper curve, lower equities, and a weaker dollar is the typical price action associated with credibility shocks faced by [emerging market] central banks,” Bank of America said in a note. “The Fed is facing a growing credibility problem.”
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Timing the next interest rate hike
The Fed’s next policy meeting is scheduled for mid-September. In the meantime, investors have begun pricing in at least one rate increase before the end of the year.
The odds of Fed policymakers approving a quarter-point rate hike by year’s end stand at 57%, according to CME Group’s FedWatch tool, which tracks investor sentiment.
JPMorgan is not forecasting an interest rate hike in 2026. But, the bank said a September hike remains possible depending on inflation’s trajectory, which the Fed has long aimed to cap at 2%.
“All things considered, our base case remains the Fed will not hike rates this year, despite markets continuing to price in 1-2 rate increases by year end,” JPMorgan Global Market Strategist Jordan Jackson wrote. “We acknowledge a hike in September as a real possibility depending on how the data evolves.”
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This article originally appeared on Moneywise.com under the title: ‘A serious mistake’: Moody’s Analytics economist says the Fed is putting the economy at risk with its silence
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