This is the third and final installment of my interview with Jim Bianco of Bianco Research at Camp Kotok in eastern Maine on August 9. The first segment focused on the July jobs report, which might not have been as bad as it seemed. The second segment focused on the $40 trillion national debt and whether we’ve finally hit a crisis point.
Jim writes frequently about the Federal Reserve, which is in a state of flux under new Chair Kevin Warsh, who took over the central bank in May. Warsh has appointed five task forces to review the way the Fed does business and suggest reforms. One issue under review is whether the central bank should continue to offer “forward guidance” that lays out its future plans on the direction of interest rates and other matters.
Warsh has argued for doing away with forward guidance. Jim generally agrees. Others think the Fed should continue telegraphing its moves, to prevent misunderstandings. This will be a topic of much debate in coming weeks and months as the Fed makes some crucial decisions about the path of inflation and interest rates. The task forces are due to report back at the end of the year, and changes could follow in 2027.
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Here’s a short discussion with Jim on forward guidance. Takeaways follow. My full chat with Jim at Camp Kotok, including some additional discussion about the Fed and the broader economy, is at the end.
The Fed wasn’t always so chatty about what it might do in the future. Famed Fed Chair Alan Greenspan, who ran the Fed from 1987 to 2006, was notoriously opaque in his public statements, to avoid having any effect at all on markets. That was the custom at the Fed for most of its history.
The Great Recession changed things. The Fed started to become more transparent during the Great Recession in 2008 and 2009, under Chair Ben Bernanke. The Fed enacted massive amounts of complex monetary stimulus during that crisis, to prevent a recession from becoming a depression. Much of it happened with little public awareness. Bernanke argued that the public should have a better idea of what the Fed is doing when it’s pulling multiple levers. He still insists that providing a public roadmap of the Fed’s likely actions can have a powerful impact that helps stabilize markets in a crisis.
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The press conference era dawned in 2011. The Fed, under Bernanke, began to hold press conferences four times a year, after four of its eight regular policymaking meetings. Until then, the Fed chair mainly communicated to the public through Congressional testimony and infrequent media appearances. In 2019, under Chair Jerome Powell, the Fed started holding press conferences after each of its eight regular annual meetings.
The “dot plot” arrived in 2012. This is a graphical representation of where 19 top Fed officials think interest rates will go during the next few years. It has become an integral part of the Fed’s forward guidance.
The Fed now bombards investors with information. Every press conference these days generates forensic analysis of the dot plot and the exact phrasing the Fed chair uses to describe the economy and the Fed’s outlook. Traders use AI to identify the slightest change in the outlook or the verbiage and spot trading opportunities. Markets sometimes surge or plunge the second the Fed chair says something unexpected.
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One problem with forward guidance is that it boxes the Fed in. When the Fed provides guidance, “the market takes it as a promise,” Jim says. Then, if the situation changes and the bank changes tack, “the Fed is kind of stuck.” Investors may trust the Fed less, and the Fed, in turn, may be reluctant to make changes it hasn’t telegraphed. That can distort decision-making both at the Fed and in the markets.
Markets will adapt. What will markets do if there’s less Fed guidance? “The market’s made up of very competent people,” Jim says. “Let them figure it out on their own.”
Here’s my full interview with Jim: