Ending forward guidance. Centralbanker skall INTE vara förutsägbara.
The entire philosophy of post-2008 central banking may be entering a rollback phase
Since 2008, the Federal Reserve has operated under a set of assumptions that would have been unrecognizable to Walter Bagehot or Paul Volcker.
Forward guidance as a primary tool. Permanent balance sheet expansion as the default response to any stress. The central bank as a perpetual crisis manager rather than a last resort.
That is the Bernanke/Yellen/Powell regime, and we are living with the rather severe unintended consequences.
The low interest rate, QE (infinity), balance sheet expansion regime created a distortion in asset markets and is the basis for much of the income and wealth disparity that has developed in the last 17 years.
Bernanke explicitly said he was targeting asset prices in order to create a wealth effect. The very people who mocked trickle-down economics under Reagan practiced an extreme version that resulted in trickle up.
Warsh may be the first Fed chair in a generation who intends to reverse that regime. Not just tighten policy. Reverse the philosophy. Back to something that Greenspan and Volcker would recognize.
Rolling that back, if that is indeed what Warsh intends, will be harder than raising rates.
It will mean ending forward guidance as a crutch (krycka).
Restoring market discipline. Re-establishing a clear separation between Fed and Treasury functions. Rebuilding price discovery in bond markets that have been distorted for fifteen years.
Shrinking the Fed's footprint in ways that will feel uncomfortable to markets that have come to depend on the backstop.
And he will be opposed by many market participants, who learned to game the system, and by much, if not most, of the staff at the Eccles building.
Mild-mannered Kevin Warsh is as revolutionary spirit as it gets in monetary policy.
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