Fed Chair Warsh Reduces Market Communication...Holds Private Calls with Trump

Sticking to Reduced Communication Despite July Press Conference Confusion

Open to September Rate Hike If Inflation Remains Hot

Multiple Calls with Trump Since Taking Office

Debate Over Fed Independence Likely to Continue

U.S. Federal Reserve (Fed) Chair Kevin Warsh is expected to maintain his strategy of reducing policy signals provided to markets, even amid criticism that his recent press conference failed to sufficiently explain inflation-fighting measures, leading to turmoil in the Treasury market. Meanwhile, it has also come to light that since taking office, Warsh has had several private phone calls with U.S. President Donald Trump, prompting rising concerns about the independence of the Fed.

Kevin Wash, nominee for Fed Chair. Photo by AP Yonhap News

It has been revealed that while Chair Warsh has reduced communication with the markets, he has conducted multiple private phone conversations with President Donald Trump since taking office. There is no evidence that President Trump has requested specific monetary policy actions, but observers note that debates over the Fed’s independence could be reignited.

According to the Financial Times (FT) and Bloomberg News on the 6th (local time), people close to Warsh acknowledge that he made some communication mistakes during the first 10 weeks of his tenure.

During the July Federal Open Market Committee (FOMC) press conference, Warsh essentially refrained from commenting on the future path of interest rates. As a result, the market questioned the Fed’s willingness to respond to inflation, which led to a sharp rise in long-term U.S. Treasury yields.

Especially with energy prices rising due to President Trump’s war in Iran, analysts noted that Chair Warsh’s limited communication undermined confidence in the Fed’s response to inflation. Some of these concerns were reflected in the increase in long-term Treasury yields.

Chair Warsh is reportedly prepared to raise the policy rate at the upcoming September FOMC meeting if forthcoming inflation data prove stronger than expected and market expectations for rate hikes increase.

Following FT’s report on the possibility of a rate hike by Chair Warsh, the yield on two-year U.S. Treasuries—a sensitive indicator of monetary policy expectations—rose by 0.04 percentage points to 4.22%.

Chair Warsh’s strategy to reduce communication is seen as the most significant change he has implemented as Fed Chair. Previous Chairs Jerome Powell, Janet Yellen, and Ben Bernanke provided the markets with relatively detailed explanations about the economic outlook and future policy direction. In contrast, Warsh has criticized excessive forward guidance, arguing that it binds the Fed to its own statements and reduces policy flexibility.

Warsh believes that investors should break away from focusing excessively on Fed officials’ statements, allowing them to scrutinize economic indicators themselves more closely.

Reduced Market Communication...Private Calls with Trump

U.S. President Donald Trump. The White House

While Chair Warsh has reduced communication with the markets, it is known that he has had multiple phone conversations with President Trump since his inauguration in May. According to Bloomberg News, President Trump has held irregular conversations with Warsh, seeking his views on the economic outlook and various policy issues. However, Bloomberg reported that President Trump did not directly pressure Warsh to adopt particular policy stances, and it could not be confirmed whether the two discussed specific monetary policy or interest rates.

There have been previous instances of U.S. presidents communicating or meeting with Fed chairs, but such contacts have been rare. In some cases, former Fed chairs even made their meetings with the president and the substance of their conversations public.

Since President Trump has long pressured the Fed to cut rates, observers have pointed out that such private contacts between a sitting president and the Fed chair can raise concerns over the central bank’s independence. Bloomberg also noted that persistent pressure from President Trump could blur the line between the administration and the central bank, potentially undermining the Fed’s independence.

Meanwhile, Chair Warsh is expected to present the theoretical foundation for his communication strategy and vision for Fed reform at this month's Jackson Hole Economic Policy Symposium hosted by the Kansas City Fed.

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