New Fed Chair Kevin Warsh’s decision to drop forward guidance may actually empower the central bank’s other policymakers

The Federal Reserve has for decades moved steadily from a remote, opaque government agency that shared little about what it did or why to a more transparent institution willing to explain how it makes decisions and what it thinks about the economy. But in his first press conference Wednesday, new chair Kevin Warsh began to reverse some of those steps. Warsh, like many economists, thinks the financial markets have become too dependent on Fed guidance, and that such direction is more effective in financial crises or economic downturns. Warsh quickly made changes: The Fed’s statement on its interest-rate decision was slashed to 132 words, from 341 in April. And Warsh pointedly noted that the statement excluded any hints, or “forward guidance,” about what the Fed’s next moves might be. In short, Warsh rapidly delivered on a promise to slash the Fed’s communications, particularly the guidance it gives to financial markets about its next interest-rate moves. Yet such an approach carries the risk of more violent swings in stock and bond prices, analysts say, and ultimately could lead to higher interest rates for consumers and businesses. “Forward guidance in general has served to suppress volatility and anchor market expectations,” said George Pearkes, global macro strategist at Bespoke Investment Group. “And that has led to lower borrowing rates, relative to alternatives.” Still, the impact on consumers is likely to be modest, Pearkes added, with mortgage rates perhaps a quarter-point higher than they would be otherwise. Financial markets see-sawed, then fell Wednesday after the statement and news conference. The yield on the 10-year Treasury, which strongly influences mortgage rates, jumped Wednesday to 4.49% from 4.43%, though it fell back in Thursday trading. The yield on the 2-year Treasury, which closely tracks expectations for Fed action, was 4.16% Thursday, up sharply from 4.05% before the Fed’s meeting. The broad S&P 500 stock index dropped