Warsh Finds Support From European Central Bank Leaders on Ending Forward Guidance

Federal Reserve Chairman Kevin Warsh’s vow to end the practice of offering forward guidance on what the central bank might do is getting a receptive audience in Europe.The idea of offering the guidance came up multiple times Wednesday during a panel discussion at an annual central banking forum at Sintra, Portugal.Central banks have issued forward guidance to signal the direction where they expect interest rates may be headed — sometimes months before meetings where rate decisions are made. The markets react to that news and Mr. Warsh said that it results in the central bank being limited in its response to changing conditions.“If I have one regret it is to have felt bound and compelled by forward guidance,” European Central Bank President Christine Lagarde said at the event.“We have found common cause,” Mr. Warsh responded. “Reform does not stop at the water’s edge,” he added.Bank of England Governor Andrew Bailey and Bank of Canada Governor Tiff Macklem also voiced opposition to offering guidance.“What I have found most exhilarating over the past two days here, is the kind of discussions that we’ve begun at the federal reserve, as a lot of people at this conference, open minded, keen to think anew about the conduct of monetary policy, and President Lagarde’s answer on forward guidance, I couldn’t have said it better myself,” Mr. Warsh continued.Mr. Warsh, in keeping with his promise, would not hint at whether the Fed will raise interest rates at a policy meeting at the end of July. “I want us to have a good family fight when we meet in four weeks,” Mr. Warsh said. He did note that “prices are too high,” meaning inflation remains a concern. The central bank generally raises interest rates in an effort to slow economic growth and restrain inflationary pressures.Investors are growing to expect a rate increase as the Fed’s next move. At last month’s Fed meeting most officials predicted holding rates steady or increasing them. CME FedWatch Tool now puts the chances of a rate increase at this month’s Fed meeting at more than 25 percent. The probability jumps to nearly 85 percent by December. The tool showed almost no expectation of rate increases at the start of the year, instead giving the chances of a rate cut in 2026 at more than 75 percent.In June, at his first press conference since becoming Fed chairman, Mr. Warsh announced he would create five task forces to explore a range of reforms at the central bank. Among his goals is to shrink the Fed’s balance sheet and refocus the central bank on monetary policy. The Fed had total assets of $894 billion in 2007. By this March, those assets totaled $6.7 trillion.On Wednesday, Mr. Warsh said he planned to announce the staffing of the task forces next week. He said he hoped to implement changes using input from those groups within a year. Mr. Warsh has suggested changing how the Fed determines the inflation rate it uses to guide interest rate decisions.

Warsh Finds Support From European Central Bank Leaders on Ending Forward Guidance

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