The Quietest Man in the Loudest Market

There is something inherently strange about being Chairman of the Federal Reserve.

You are basically an economist who becomes a quasi-celebrity and is then assigned, certainly incorrectly, superhuman visionary powers to see the future of the economy and steer it. Alan Greenspan had it to an absurd degree — there was a period when television crews filmed the thickness of his briefcase on the way into meetings and analysts wrote notes about what it meant. Some central bankers embrace the role. Others try to evade it. But all of them, historically, speak — through the minutes of the Federal Reserve meetings, through press conferences, through mandated testimony before Congress. On Friday, at Jackson Hole, marking his 100th day as Chairman of the Federal Reserve, Kevin Warsh made clear that he intends to be something different.

He declined to provide any forward guidance. And he declined to define a reaction function — the conditions that would cause the Fed to raise or lower interest rates.

I don’t blame him. On one side is a President who has been unusually explicit about wanting lower interest rates — and who, standing on a tarmac recently, answered a question about intervening in the bond market by saying “the ultimate intervention is our military. And if we have to use that, we will.” (The implied threat being a military action against any nation holding US bonds that decides to sells them.) On the other side is a Treasury Secretary running his own interventions effectively underming Warsh’s position as the market guide and leaving the Fed chair between a rock and a hard place.

And in the middle of that, the new Chairman has decided the appropriate posture is silence.

But there is a problem.

The bond market doesn’t stay quiet and the less it knows the more it tends to see elevated risk - and raise the price of everything. Compounding matters, The federal statistical apparatus that produces the numbers the entire world prices off is quietly degrading. Survey response rates for the monthly jobs report have declined steadily for a decade — the GAO said so directly in a June report, warning that falling participation in the household and establishment surveys creates a direct risk to the reliability of data that guides trillion-dollar decisions. Presidents can make promises. Congress can spend money. Central banks can set overnight interest rates.

But none of them can permanently dictate the price at which the world will lend us money.

That price eventually belongs exclusively to the market.

And, here’s the actual position. Inflation is running well above target by measures the Chairman himself says are imperfect. The 30-year Treasury yield recently hit a nineteen-year high. The Treasury is intervening on its own account. The President is invoking the military. The statistical agencies producing the underlying numbers are losing staff, losing coverage, and losing public trust simultaneously.

And the man whose job is to be the credible stabilizing voice in the middle of all of it has decided to go silent. I wrote last week that the bond market is the most important story in the world — the world’s disciplinarian, the one price that cannot be lobbied or primaried or demonized, continuously rendering a verdict on whether a country is being run responsibly. That market’s verdict is only as good as the information it’s rendered on. A bond market that has little guidance and can’t fully trust the data doesn’t stop pricing. It prices anyway — with wider error bars, thinner conviction, and a much larger premium demanded for being asked to fly on instruments nobody can fully vouch for.

That premium has a name. and its the price you pay for your mortgage, your loans and your credit. Silence works fine when the room is calm and everyone agrees on the facts. It becomes something else entirely when the facts themselves are in question and the most powerful market on earth is repricing it in real time.

There’s an irony worth naming here, and it isn’t small.

In 2014, Kevin Warsh personally authored a review commissioned by the Bank of England on the importantce of transparency at its Monetary Policy Committee. The man now declining to explain his reaction function once wrote the report on how a central bank should communicate transparently.

I don’t raise that to score a point. I raise it because it suggests he understands exactly the tradeoff better than almost anyone alive. This isn’t naivety about the value of transparency. It’s a deliberate judgment that under current conditions the costs of speaking — exceed the costs of silence.