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In his most recent comments, Federal Reserve Chairman Kevin Warsh underlined the Fed's dedication to reaching price stability and lowering inflation to the 2% goal, so sending a rather hawkish tone. He encouraged a more data-dependent strategy whereby markets respond to fresh economic information instead of Fed statements, therefore indicating a move away from forward guidance. Markets saw Warsh's demand for central bankers to get back to "fundamental principles" as a sign that tighter monetary policy would last for a long time.
Warsh's speech highlights key issues including a major emphasis on inflation, a preference for less forward guidance in favor of market responses to data, and an analysis of several Fed structural frameworks including data usage, balance sheet policies, and communications. His view of the labor market as stable and possibly getting better helps to justify a conservative approach about possible interest rate cuts. This point of view holds that the Fed is not eager to start relaxing policy.
Based on the market's reading of Warsh's comments, the Fed seems to be hesitant to quickly relax its policy. This position will probably be mildly supportive of the U.S. dollar and a headwind for assets vulnerable to interest rates including gold and long-duration bonds. But as Warsh said, the ultimate market driver remains the impending inflation and employment statistics, since he prefers the Fed to respond less and let economic signals direct policy choices. Macro traders should concentrate on crucial economic data including CPI and payrolls instead of depending only on verbal direction as Warsh indicates a will to follow policy discipline over immediate rate reduction.
