Goldman: Warsh’s quieter Fed: why less guidance could mean more market volatility

Less forward guidance shifts the burden onto data, which points to bigger moves in short-dated Treasuries, the dollar and rate-sensitive equities around key releases, as this week’s CPI reaction showed. Bond volatility may stay elevated even if the eventual Fed path matches the consensus for a single December hike. Oil is a central variable in that regime: with the Iran war keeping energy costs high, every swing in crude feeds directly into inflation expectations, and with less Fed guidance to anchor them, into rate pricing. Gold is likely to keep trading off yields and hike expectations rather than geopolitical headlines.--- Warsh wants markets to stop staring at the Fed and start reading the economy, but after 15 years of hand-holding, the first steps without guidance may be wobbly ones.Summary:Warsh has set up five task forces, including one on communications, and wants the Fed to reveal less of its internal thinkingHe opposes giving guidance on upcoming rate decisionsGoldman’s Investment Strategy Group expects changes to be gradual, but flags concerns about longer policy lags and extra volatilityRate pricing has already swung sharply on data, including a slump in October hike odds in late September and a jump in yields after this week’s CPIMost major banks expect one more Fed hike in DecemberWarsh speaks in Bangkok on Friday, ahead of the 27–28 October FOMC meeting For more than a decade, investors have been trained to read the Federal Reserve’s every word. Kevin Warsh wants to break the habit, and Goldman Sachs is warning clients that weaning markets off Fed guidance could come with a price: longer policy lags and more volatility.The Fed chair, who speaks at the IMF and World Bank meetings in Bangkok on Friday, has set up five task forces to review how the central bank works. They cover communications, the balance sheet, data sources, productivity and jobs, and the inflation framework. Communications is the one most likely to change how markets trade. Warsh has argued that the Fed should say less about its internal thinking so that investors form their own view of the economy, likening it to watching the game rather than the official. He has also said he opposes giving guidance on whether the Fed will hike, cut or hold at upcoming meetings.In its latest quarterly update for clients, Goldman’s Investment Strategy Group said any changes from the task forces are likely to be gradual. But it flagged a concern shared by some investors. If the Fed tells markets less, it may take longer for policy to work through financial conditions, and the adjustment could be bumpier for both markets and the real economy.The logic is straightforward. Forward guidance has long worked as a policy tool in its own right. When the Fed signals its path, bond yields, mortgage rates and the dollar move ahead of any decision, doing part of the tightening or easing in advance. Take the signals away and markets must wait for the data, and for the decisions themselves, to adjust. That could mean bigger moves on key releases and more frequent repricing between meetings.There are early signs of what that looks like. In the space of a week in late September, futures pricing for an October hike swung from around 70% to below 40% as softer inflation data and comments from a senior Fed official changed the picture. Goldman itself pushed back its expected next hike from October to December at the start of the month. This week’s hotter-than-expected consumer price data then lifted Treasury yields sharply as traders added to bets on further tightening.The September hike, the first since 2023, came with a statement that offered no explicit guidance on future moves. That leaves markets leaning heavily on data and on individual officials, with regional presidents such as Cleveland’s Beth Hammack filling some of the gap with their own views.Warsh’s case has merit. Heavy guidance can lock a central bank into a path that the data no longer support, and can encourage markets to bet on the Fed rather than on the economy. A market that does its own homework may also price risk more honestly. The trade-off is that the transition period, while investors relearn how to read the economy without a script, is likely to be noisier.For traders, that suggests a regime in which economic releases matter more and Fed meetings matter differently. Short-dated Treasuries, the dollar and rate-sensitive equities are likely to be the most exposed. Bond volatility may stay elevated even if the Fed’s path ends up close to what Wall Street expects, with most major banks now forecasting a single further hike in December.Friday’s appearance in Bangkok is a test case. If Warsh sticks to his script and offers little on October, markets will have to make their own call before the Fed meets on 27 and 28 October, which is exactly the point.  This article was written by Eamonn Sheridan at investinglive.com.