Commentary from Anant Kumar, Global Investment Strategist at Benefit Street Partners
Scaling back forward guidance is a real and interesting experiment. It stops the lazy thinking that let everybody outsource their rate view to the Fed and returns price discovery to the market.
But an economy is a complex adaptive system and every participant reacts differently to news. Remove forward guidance and everyone must figure it out alone. With participants already unsure about the Fed's approach and debating the future, uncertainty compounds. Sell-offs become self-fulfilling spirals without reassuring Fed commentary to lean against.
The timing also matters. Warsh is making his Jackson Hole debut. While known as a governor, he's untested as chair. Meanwhile, the Treasury Secretary, a hedge fund manager by training, is conducting his own experiment by intervening to cap long yields.
So a market starved of signals will hang on every cue when Warsh takes the stage on Friday. It needs fiscal realism. You do not normally run 6% deficits with an economy this warm and the long end is demanding fiscal correction; but it got jawboning and a $4 billion buyback.
For lenders, this new dynamic argues for underwriting a wider distribution of interest rate outcomes than the forward curve implies and treating rate volatility, not just the level, as a risk.