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The biggest issue at tomorrow’s FOMC meeting… Wall Street’s skill set that may be about to decline… What Bernanke built and Warsh wants to dismantle… How to invest when the Fed is silent…
Tomorrow, every financial broadcaster on every financial network will be asking the same three questions…
- Did the new Fed Chairman, Kevin Warsh, remove the accommodative bias in the FOMC statement?
- Did he sound pessimistic or extremist in his press conference?
- How did he describe the Iran peace deal reached on Sunday – and what does it mean for inflation and price policy going forward?
These are fair and important questions.
But there is one thing that I think matters more than the language of bias or even Warsh’s direct comments about the upcoming rates policy…
Whether Warsh says anything — directly or indirectly — it indicates that he intends to dismantle one of the most powerful tools the Fed has developed over the past 15 years.
It’s a tool that Wall Street has become so completely dependent on that the entire investment ecosystem has reorganized itself around it…
Forward guidance.
If Wershe follows through on what he’s been saying for years, his days are numbered.
How the Fed taught Wall Street to stop thinking
Let’s go back to May 2013.
Ben Bernanke was testifying before Congress, answering routine questions about monetary policy.
The economy was recovering. The Fed has been running its bond-buying program – quantitative easing – at its maximum capacity since the financial crisis. Bernanke then casually mentioned that the Fed might at some point in the future begin “tapering” this program.
Nothing has changed. No rates. Not a policy. There is not a single dollar to buy bonds. Just the word — “taper” — was used loosely at a congressional hearing.
What happened next became known as the tantrum.
Bond yields rose… Stock markets fell… Capital violently withdrew from emerging markets around the world…
The damage was real, and it was significant – and all because of an impromptu hypothetical remark from a central bank governor.
That moment crystallized something important: The Fed’s words were, in many respects, stronger than its actions.
This was not an accident.
How did Bernanke build the machine?
When the financial crisis hit in 2008 and the Fed cut interest rates to zero, Bernanke faced a problem…
You can’t cut interest rates below zero — at least not in the traditional sense. So, if you want to stimulate the economy further, you need another lever.
Bernanke’s answer was communication itself.
If the Fed cannot cut interest rates further, it can at least tell markets where interest rates will stay – and for how long. By making credible commitments about the future course of policy, the Fed can influence long-term borrowing costs even when short-term interest rates are held at a lower bound.
This marked the birth of modern progressive orientation as an active political tool. The Fed introduced the bullet chart: a graph showing exactly where each Fed official expects interest rates to go over the next several years, published four times a year for all the world to see.
Jerome Powell took the architecture that Bernanke built and multiplied it. He moved to holding press conferences after every FOMC meeting — not just the four “main” meetings. Every six weeks, the Fed chair stands in front of the cameras and answers questions about the interest rate path, the economic outlook, and what might change his mind.
On many occasions, comments at these press conferences moved the market more than the FOMC statement itself.
Over time, an entire industry has sprung up around deciphering all of this…
Fed monitors. Plot point analysts. “Fedspeak” translators.
Hedge funds with entire teams dedicated to analyzing the president’s word choices. In many corners of Wall Street, the skill of reading the Fed has become more valuable than reading earnings reports.
Which brings us to Kevin Warsh – and why he wants to tear everything down.
“I don’t believe in future guidance.”
Warsh has been publicly skeptical of forward guidance for years. But at his Senate confirmation hearing in April, he put it plainly:
Unlike many of my colleagues, past and present, I do not believe in future direction.
I don’t think I should preview what the future decision might be.
This is not philosophical speculation. This is the goal of the rubber meets roads policy. He went further, explaining specifically why the bullet chart bothered him:
The Fed tells the whole world what its points will be, what its expectations will be.
Well, the Fed has stuck with those forecasts for too long.
He argues that forward guidance has become a trap — once the Fed publishes its expected interest rate path, it becomes psychologically and politically difficult to deviate from it, even when the data suggests otherwise.
In other words, a dot chart doesn’t just tell the markets about the direction of prices. It prevents the Fed from going there.
This is Warsh’s broader philosophy, as expressed by L International Monetary Fund:
The central bank must find new comfort in working without applause and without the audience sitting on the edge of their seats.
He wants a Fed that acts on the data, not one that manages expectations so carefully that it becomes a prisoner of them.
According to reports received from Financial Times As several former Fed officials have confirmed, Warsh could move to scale back or eliminate the points scheme as early as tomorrow’s meeting.
He may simply refuse to present his idea – or indicate in his press conference that the framework is under review.
But why tomorrow?
It stands to reason that tomorrow is the ideal strategic moment to make this change.
The June meeting is one of only four meetings held annually that includes an updated summary of economic forecasts – the official version containing the dot plot. Warsh simply cannot avoid this.
They must either publish it as usual, adjust the format, or make an active decision not to participate. This coercive hand makes tomorrow a real turning point, not a hypothetical one.
If he was going to move on this matter at all, tomorrow was the natural opening.
This would represent a real systemic change in how the world’s most powerful central bank communicates.
So, what is the impact on investors?
From “Don’t Fight the Fed.”“ to “Can’t find Fed”
“Don’t fight the Fed” is one of the oldest rules in investing.
The idea is simple: The Fed controls the price of money, and that price determines the value of almost every asset. Fighting the Fed is like fighting gravity.
But this rule assumes you know where the Fed is headed. It assumes that the dot plan is in place, forward guidance is in place, and the road map is clear. You may not agree with the destination, but at least you can see it.
What happens in a world where the Fed deliberately stops telling you where it’s going and when?
The short answer: Volatility is rising.
Each data release becomes a larger event. Each press conference becomes less scripted and more relevant. The market can no longer channel the Fed’s signals forward, because there are fewer signals that can be channeled forward.
Instead of a central bank that telegraphs its moves months in advance, you get a bank that responds to data in real time – and keeps you guessing until it acts.
For investors, this changes things in three tangible ways…
What’s changing – and what to do about it
one…
Stop getting hung up on Fed signals. Start positioning around the data.
If the bitmap disappears, the data becomes the new bitmap. The consumer price index… the jobs report… the personal consumption expenditures index… and especially corporate profits.
The economic data the Fed responds to takes center stage in a way it hasn’t in years. Therefore, investors who built their portfolios around reading the Fed’s communications will need to rebuild their portfolios around reading the economy directly.
This is not necessarily a worse skill, in fact it is arguably a healthier skill. But it requires a different set of tools.
This is where a fundamentals-first approach becomes more valuable, not less. Our growth investing expert, Louis Navellier, editor Growth investorHe’s spent decades building quantitative models for precisely this purpose – identifying companies with real earnings momentum rather than price sensitivity. And last week, he held an event with TradeSmith CEO Keith Kaplan to detail a new collaboration: the Lewis Quant System that finds stocks with fundamental differentiation and the Keith Quant System that adds a timing layer — a data-driven signal when it’s time to buy or sell.
You can watch a free replay of the event here. But a heads up, this is the last day it’s available, so if you plan on watching, This is the last call.
two…
Expect more volatility around data events – and consider trading them.
A less transparent Fed not only increases uncertainty, it concentrates it.
Without advance guidance to smooth the path, markets will reprice more sharply every time new data arrives. Every inflation report, every manufacturing number, and every GDP release becomes a potential inflection point.
For traders, this is a real opportunity. Jonathan Rose, editor Master of CommerceTracks institutional capital flows in real time – watching where big money is before big events rather than reacting after them.
In a highly volatile environment driven by data surprises rather than Fed signals, This type of positioning intelligence becomes more valuable.
three…
Hard assets become a more solid anchor.
Forward guidance has given investors something to rely on: a predictable price path, and a stable anchor for long-term valuations.
If this anchor weakens, the case for hard assets – especially gold – strengthens. Not as a trade, but as a structural component of the portfolio.
Central banks have been net buyers of gold for four years in a row. On the other hand, the share of the dollar in global reserves has been declining for two decades. These are not cyclical arguments. They are structural reasons – and a less transparent Fed makes the structural argument more compelling, not less.
Our global expert Eric Fry, editor Fry investment reportWe’ve been making this exact case on gold for years. As we covered yesterday digestThe bullish case for the yellow metal was significantly strengthened after Sunday’s news of the peace agreement between the United States and Iran.
What are you listening to tomorrow?
The interest rate decision itself will almost certainly be up in the air. This is true even taking into account the Iranian peace agreement reached on Sunday…
Yes, the repricing is real – yields are falling, the odds of a rate hike are diminishing, and the long-term interest rate path looks different now than it did on Friday. But tomorrow’s decision will always be up in the air.
So, there’s a different angle to watch for tomorrow…
Because the interest rate decision is essentially settled in advance, the bullet chart became the primary policy tool at this meeting — the only place Warsh could actually move the needle.
Here’s what makes it especially clever: Stripping the dot chart allows it to change the Fed’s position without the market shock of an unexpected interest rate hike.
It can tighten expectations without tightening interest rates. It’s a way to send a hawkish signal in a way that doesn’t automatically disrupt the market. If he makes this move tomorrow, read accordingly.
So we will have to watch whether Warsh signals – directly or through deliberate ambiguity – that the era of explicit Fed guidance is over.
If it refuses to show the price path when pressed, this is a signal. If he responds to a journalist’s question about future moves with something like, “The data will tell,” that’s a sign. If anything comes out about the dot chart being under review, that’s clearly a huge signal.
And if he kills the plot point on his first encounter?
Well, that tells you how important this is to his view of the Fed – and how quickly the rules of the game are changing.
We will be watching closely. We will have a full analysis here tomorrow digest After the decision fell.
Bottom line: The old rule was not to fight the Fed. The new rule – if Warsh gets his way – is that you’ll have to find him first.
I wish you a good evening,
Jeff Remsburg
