The Warsh Fed could usher in an era of market yips
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If a quieter Federal Reserve means yippier bond markets, stocks could be in for a ride, too.
Why it matters: In recent months, the stock market has grown especially sensitive to changes in yields on U.S. government bonds — referred to as "rates" on Wall Street — which are themselves influenced by the policy of the U.S. central bank.
Driving the news: New Fed chairman Kevin Warsh's emerging effort to ratchet back the Fed's yearslong approach to communication known as "forward guidance," which our Macro colleagues recently spotlighted.
- The Fed essentially used forward guidance to give traders and investors a lot of information about what policymakers there were thinking about the economy and how they expected to react to possible developments.
- Warsh believes that effort went too far, saying in Wednesday's news conference that "when all the financial markets are doing is reflecting back what we've said, then we're taking the most important source of information and we're being blind to it."
Yes, but: Analysts think that without forward guidance, bond markets will likely see sharper moves, otherwise known as volatility.
What they're saying: "Warsh is more clearly putting his imprimatur on the Committee's communications, and reduced forward guidance risks volatility rising over time," JPMorgan analysts wrote Wednesday.
The bottom line: If the current relationship between stocks and bonds holds, that volatility will spread to the stock market as well.
