One imagines that Federal Reserve Chairman Kevin Warsh is feeling quite worried about inflation right about now.
Despite the Federal Open Market Committee raising the federal-funds rate last month, money still feels easy to come by. Stocks are trading near record highs, and prices are accelerating across the economy. Inflation data released by the Bureau of Labor Statistics this week show that, in September, producer prices had their largest monthly gain in more than four years, and consumer prices rose 3.7% from a year earlier. Core consumer prices, excluding volatile food and energy categories, climbed 2.6%, up from 2.4% in August.
And Warsh still won’t say what the Fed will do next or how it will respond to the incoming data. Much to the chagrin of Fed watchers and markets, his silence is intentional. He prefers to hear what markets have to say—“unfiltered.”
Warsh has long been skeptical of offering forward guidance, or guidance of pretty much any kind. For example, he has chosen not to reveal his Fed’s “reaction function”: an explanation of how the voting committee weighs its goals of stable prices and maximum employment, how far the economy is from them, and how fast it expects to get there.
Unfortunately, that reluctance to spell out a reaction function is creating unnecessary market volatility, as evidenced by the gyration in rates after Wednesday’s morning’s consumer price index report. With wars raging, technological innovation accelerating at an unprecedented pace, and supply shocks rolling across continents, markets need stability more than ever. Each disruption pushes inflation further away from its inflation target and eats away at the Fed’s credibility.