{"text":[[{"start":10.6,"text":"The break with tradition could hardly have come more swiftly."}],[{"start":13.72,"text":"After more than a decade in which the world’s most important central bank has taken great pains to telegraph its next moves — for fear of market-shaking surprises — the new head of the US Federal Reserve made clear a new, more tight-lipped era had arrived."}],[{"start":28.24,"text":"Little more than 20 minutes into his first public appearance as Fed chair, Kevin Warsh set out his intention to be “very curt” in response to questions about his plans for one of the world’s most important economic levers — US interest rates."}],[{"start":41.98,"text":"The question is whether his taciturn approach to public policy will soothe the volatility of the bond market that sets the world’s cost of capital or, instead, stoke it."}],[{"start":52.6,"text":"Those who know Warsh well say his policy of saying much less than his predecessors about the central bank’s intentions has long been planned."}],[{"start":60.76,"text":"Since ending his first stint at the Fed 15 years ago, he has fiercely objected to forward guidance — the practice of rate-setters signalling to markets their intentions ahead of time."}],[{"start":null,"text":"

"}],[{"start":71.32,"text":"But many market players and Fed veterans worry that the shift has come at an awkward time — when bond market volatility is a concern due to an increase in government and corporate indebtedness, and as financial regulators warn about levels of leverage and the role of hedge funds."}],[{"start":86.78,"text":"Those close to Warsh say he believes central banks have become trapped by their own words and shown little faith in investors’ abilities."}],[{"start":94.16,"text":"“Financial market prices are probably the most important source of information to guide central bankers,” he said at his inaugural press conference last month. “But when all the financial markets are doing is reflecting back what we’ve said, then we’re taking the most important source of information and we’re being blind to it.”"}],[{"start":111.98,"text":"Many agree with the Fed chair’s view that central banks’ focus on predictability has led to a world in which markets obsess more over what officials say than what is actually happening in the economy."}],[{"start":121.64,"text":"“Forward guidance has turned markets into a mirror,” says Ajay Rajadhyaksha, global chair of research at Barclays. “The Fed watches markets; markets watch the Fed. And no one’s actually watching the economy.”"}],[{"start":134.28,"text":"But as Warsh prepares to smash the hall of mirrors, investors may need to prepare for a bumpy ride."}],[{"start":139.88,"text":"Janet Yellen, the former Fed chair and Treasury secretary who was one of the architects of the central bank’s emphasis on forward guidance, warns of the impact on the world’s main benchmark for financial markets — the yield of 10-year US Treasury bonds, which moves inversely to price."}],[{"start":154.98,"text":"“Market participants aren’t going to know how to price the 10-year Treasury yield unless they understand how the Fed will set rates contingent on different developments in the economy,” she says. “This is simple accountability — it’s explaining what you’re doing.”"}],[{"start":168.64,"text":"Recent research by the US central bank suggests its decisions also have an outsized impact on equity markets, leading to big changes in how investors price stocks."}],[{"start":178.12,"text":"Advocates of forward guidance say it helps avoid the sort of surprises for the markets that feed overall volatility and eventually raise borrowing costs as investors demand greater compensation to stomach market swings."}],[{"start":190.2,"text":"Warsh and his allies counter that the attempt to pacify markets simply encourages greater risk-taking, damping short-term volatility but storing up bigger shocks for later."}],[{"start":199.74,"text":"The debate is all the more important because of the backdrop: the surge in borrowing over almost two decades. Government debt around the world has risen sharply following the global financial crisis, the Eurozone crisis, the pandemic and the wars of the 2020s."}],[{"start":null,"text":""}],[{"start":215.52,"text":"Later this decade, US federal debt held by the public is set to surpass its pre-second world war highs. The country’s debt-servicing costs are due to double over the next 10 years."}],[{"start":225.74,"text":"The bond markets have also been transformed by structural changes to who ultimately owns the debt and how it is traded. As debt levels have soared, demand from US Treasuries’ traditional long-term sources of financing, such as pension funds and insurance, has remained relatively flat."}],[{"start":241.36,"text":"Instead their role is increasingly being superseded by hedge funds that borrow to invest, which have a voracious appetite for Treasuries and bet on tiny differences in interest rates."}],[{"start":251.42,"text":"The Fed estimates that large hedge funds’ holdings of US Treasuries doubled between 2023 and 2025, faster than the growth of the market as a whole. Such funds now own more than $2.5tn in Treasuries, according to the US central bank and US Treasury data. Such sums dwarf China’s official holdings — not an exhaustive account of the country’s exposure — which have fallen from $1tn in December 2021 to $659bn in May 2026, according to US Treasury statistics."}],[{"start":null,"text":""}],[{"start":284.44,"text":"Moreover, the Bank for International Settlements, the central bankers’ bank, has warned that the hedge funds might have to dial back their stakes in government bond markets even quicker than they arrived — a possibility it describes as one of the most troubling financial stability risks in the world today."}],[{"start":300.52,"text":"Nor is it just the public sector that is increasing its debts. The Bank of England said this month that AI hyperscalers borrowed more in the first half of 2026 than in the whole of 2025. So far this year they have accumulated as much new debt as the UK government."}],[{"start":317.16,"text":"An interest-rate surprise from the Warsh Fed might not only unsettle Treasury yields but set off a vicious circle of margin calls — when a sudden price movement in assets bought with borrowed money requires an injection of capital — and fire sales by hedge funds that could create a dash for cash."}],[{"start":333.12,"text":"Torsten Sløk, chief economist at Apollo, the private equity giant, says that there is more chance of such a scenario — which he labels a “leverage unwind” — because of the Fed’s change of stance. He adds: “It is indeed the case that when you have less forward guidance, things can happen all of a sudden.”"}],[{"start":333.62,"text":"Odyssean guidance"}],[{"start":351.28,"text":"The origin of the debate lies in the global financial crisis."}],[{"start":354.64,"text":"Under then chair Ben Bernanke, the Fed was at the forefront of efforts to calm the market turmoil that followed Lehman Brothers’ collapse in 2008."}],[{"start":362.64,"text":"Bernanke’s commitment to keep interest rates low provided a backstop to the US financial system and helped stave off a second Depression by creating the conditions where many households and businesses could continue to borrow at low rates."}],[{"start":375.04,"text":"Talking about future policy also gave the Fed influence over economic behaviour at a time when near-zero interest rates meant it had little scope to cut borrowing costs any further."}],[{"start":null,"text":""}],[{"start":384.76,"text":"Warsh, who worked closely with Bernanke at the time, was squeamish at central banks remaining on the front pages long after the worst of the turmoil had subsided."}],[{"start":393.44,"text":"In 2011, he quit the Fed in part due to his objections over communications policy. Fifteen years on, many officials and investors share his distaste for what some dub Odyssean guidance because it ties officials’ hands to the mast."}],[{"start":408.12,"text":"Other central bankers agree that the way the world’s monetary guardians talk to markets can be improved — partly because interest rates are no longer close to zero and partly because previous commitments were too strict. On occasion they became a source of embarrassment when the forward guidance backfired."}],[{"start":425.08,"text":"Mark Carney, the former Bank of England governor who is now Canada’s prime minister, was labelled an “unreliable boyfriend” by UK lawmakers in 2014 after a swifter than anticipated fall in unemployment undermined a promise to keep rates on hold for an extended period."}],[{"start":441.46,"text":"At a meeting in the Portuguese town of Sintra just over two weeks ago, European Central Bank president Christine Lagarde and the BoE’s current governor Andrew Bailey both indicated a certain level of sympathy with Warsh’s stance."}],[{"start":null,"text":""}],[{"start":454.92,"text":"Lagarde said it was time for a “back-to-basics approach”, although she was happy to talk about how the ECB would react if circumstances changed from those of today."}],[{"start":464.28,"text":"Bailey echoed Warsh’s view that too many reassurances to investors could remove officials’ room for manoeuvre and push them into policy errors."}],[{"start":472.44,"text":"Privately, others on the rate-setting Federal Open Market Committee (FOMC) acknowledge much the same."}],[{"start":478.76,"text":"Some analysts highlight the so-called taper tantrum of 2013 — when markets were unnerved by Fed statements about its plans to shrink its balance sheet as a result of officials’ false sense of certainty."}],[{"start":490.46,"text":"Others link the 2023 collapse of the US’s Silicon Valley Bank to central bankers’ previous pledge to keep interest rates low. The Fed, like many of its counterparts, had thought post-pandemic inflation would prove merely transitory — but then had to make sharp rate increases that wrongfooted lenders like SVB and led to big writedowns of the bank’s holdings of Treasuries."}],[{"start":512.04,"text":"Sløk, the Apollo chief economist, argues that Warsh may seek to pull back on forward guidance as a means to lower the chance of a big “systemic” risk hitting the financial system. “If you feel that financial markets are too complacent, the question is whether you can shock that complacency out,” he says."}],[{"start":530.24,"text":"But the benefits of a little more volatility would be wrecked if the Fed became a wayward player in the market."}],[{"start":536.28,"text":"Chris Waller, an influential governor at the Fed, has suggested that he thinks Warsh needs to say more about the central bank’s thinking regarding scenarios or risks in the economy. He argued this month that doing so reduces uncertainty and “makes everyone’s life better”."}],[{"start":551.64,"text":"Fed veterans point to recent sharp movements in the yield on the two-year Treasury note — which reflects investors’ interest rate expectations — as evidence that the markets need more guidance than Warsh is currently willing to offer."}],[{"start":563.58,"text":"“We saw in the wake of the June press conference the biggest increase in two-year yields since the ‘liberation day’ tariffs,” says former Fed vice-chair Lael Brainard, comparing the reaction to Warsh’s comments last month to the market sell-off triggered by the swingeing import duties announced by US President Donald Trump last year."}],[{"start":583.36,"text":"She adds that “barely two weeks” after Warsh’s inaugural appearance yields had returned “a good part” of the way to their former level, bringing with them interest rates in the real economy."}],[{"start":593.28,"text":"That return to relative normality, she says, was “not based on new data, but [instead on] the statement from the new chair [Warsh] that inflation risks had diminished”."}],[{"start":603.54,"text":"One recent study also appears to undermine Warsh’s argument. While he voices concerns that investors focus too heavily on Fed officials’ comments, recent research by Sweden’s Riksbank indicates that this has not been the case since the 2022 inflation surge."}],[{"start":619.64,"text":"Between 1990 and 2022, an era in which the status and prominence of central banks steadily grew, US 10-year government bond yields fell by more than 7 percentage points. All of the downward moves throughout that period took place during the three days around Fed meetings, rather than in response to political events or economic data."}],[{"start":639.02,"text":"But the relationship broke down after the Fed appeared flat-footed on inflation in 2022. The Riksbank data shows that the central bank’s meetings had little to do with the subsequent rise in yields."}],[{"start":null,"text":""}],[{"start":652.14,"text":"Investors warn that they will eventually need some sense of how Warsh views the US economy and the Fed’s likely response to changes in the outlook. “Markets don’t need to know the destination,” says Rajadhyaksha at Barclays. “But we need some sense of where north is on the map.”"}],[{"start":668.3,"text":"One danger is that if Warsh does not set the tone, his voice will be replaced by regional Fed presidents, many of whom set rates on the FOMC, sowing confusion about where the centre of gravity of opinion lies."}],[{"start":681.72,"text":"“There are still a bunch of regional Fed presidents giving speeches every week,” says Vincent Reinhart, a former Fed official who is now chief economist at BNY Investments. “I don’t think you’ve eliminated Fedspeak if the chair talks less; you’ve just made it noisier and less co-ordinated.”"}],[{"start":698.94,"text":"Within the Fed board, Waller has sought to take the reins in shaping the US central bank’s message, saying that it would be justified to raise rates “in the near term” if core inflation — a measure that strips out volatile food and energy prices — remains high."}],[{"start":713.66,"text":"On Thursday, Dallas Fed president and FOMC voter Lorie Logan went further by calling for “modestly higher interest rates” to steer inflation back to the Fed’s goal of 2 per cent."}],[{"start":724.66,"text":"For all his desire for regime change, those who know him well say Warsh is unlikely to press his fellow governors or regional Fed chairs to adopt his communications stance."}],[{"start":734.46,"text":"He is not seen as likely to clamp down on them speaking in public, or even discourage them from submitting their projections as part of the Fed’s quarterly dot plots, which survey the central bank’s decision makers’ views on future interest rate movements. He hopes instead that, over time, the views of more of the FOMC will shift in line with his own."}],[{"start":754.04,"text":"If Warsh talks less in public, some are also concerned it will create demand for investors to have private meetings with central bankers — and greater reputational risk for the Fed."}],[{"start":762.2,"text":"Some cite a recent meeting held by Bank of America, at which Fed governor Michelle Bowman spoke, as an example of the risks the US central bank faces. Bowman has denied she broke internal regulations, even though the meeting was held during the Fed’s blackout period, when officials face strict rules on what they can say and whom they can meet."}],[{"start":780.88,"text":"“I did not share my views on monetary policy,” Bowman says in a statement to the FT. “I have consistently complied with all applicable FOMC and ethics rules and remain firmly committed to doing so.”"}],[{"start":792.78,"text":"The Fed’s meetings with the private sector are intended to involve financiers informing officials of market developments rather than cover monetary policy issues."}],[{"start":801.06,"text":"“Governor Bowman’s case seemed like a clear violation of the rules to me,” says Jon Faust, a former Fed official who is now at Johns Hopkins University. “Perhaps they need to tighten a few things up.”"}],[{"start":812.44,"text":"Warsh said he would support a review by the Fed’s independent inspector-general of Bowman’s appearance at the meeting. “It’d be inappropriate for me to prejudge facts,” he told senators last week, adding that Bowman had so far impressed him as an “excellent colleague”."}],[{"start":825.42,"text":"‘Get one thing right’"}],[{"start":827.5,"text":"The new Fed chief’s stance on communications is an undeniable change from the approach of his immediate predecessors — Jay Powell, who Trump attacked for refusing to cut rates, as well as Yellen and Bernanke."}],[{"start":838.64,"text":"But Warsh also recognises that, when it comes to imposing his vision for a radical revamp of the way the world’s most important central bank communicates with markets, he will not be able to break entirely with the past."}],[{"start":850.04,"text":"Those who know him say the Fed chair appreciates he will need to take his fellow rate-setters’ views into account. To convince them of the merits of his arguments, Warsh has launched a task force on communications to look at “how the Fed conveys policy deliberations and decisions amid uncertainty”."}],[{"start":865.1,"text":"It is set to cover everything from the structure of FOMC meetings, to press conferences, the dot plots and the accounts of the votes that at present come three weeks after interest rate decisions. The results are expected before the end of the year, when they will be debated in a series of what Warsh has described as “family fights” by the rate-setting committee."}],[{"start":887.34,"text":"One of the three co-chairs of the task force is former Bank of England governor Lord Mervyn King. He shares with Warsh “scepticism about forward guidance [outside times of crisis], and an emphasis on uncertainty”, according to Donald Kohn, a former Fed vice-chair who has worked closely with both."}],[{"start":null,"text":""}],[{"start":904.7,"text":"Warsh himself carried out a 2014 review of the BoE’s communications policy, which led to many changes that remain in place and may hold clues to what is in store for the Fed."}],[{"start":914.7,"text":"The BoE innovations include two stages of monetary policy discussions. The first involves free, open and private debate; only a more formal second round is recorded in the minutes. In another change, more contemporaneous accounts of BoE debates now tend to focus on big topics — rather than what some depict as the Fed’s “scorekeeping” approach."}],[{"start":935.66,"text":"Those close to the new Fed chief add that his approach to communication is likely to move on from the “say as little as possible” tactic of his first few weeks."}],[{"start":945.34,"text":"Forward guidance, as markets knew it, may well be dead, but government debt markets are fragile. While the Fed will no longer spell out its intentions to investors, Warsh has made clear he understands the dangers of unpredictability."}],[{"start":958.52,"text":"Those who think he will say as little as the late Alan Greenspan, the 1987-2006 Fed chief who was often deliberately opaque, may also be proved wrong."}],[{"start":968.44,"text":"Warsh greatly respects Greenspan’s record. But he has signalled that he recognises that the world has changed — and that he will not be able to employ Greenspan-style “constructive ambiguity”."}],[{"start":979.06,"text":"The former Fed chief used unclear comments to give the central bank as much flexibility as possible, even if that meant misleading or confusing markets. By contrast, in testimony to Congress on Wednesday, Warsh argued that misdirection was the last thing he intended."}],[{"start":993.66,"text":"“I don’t expect any of the change in communications to be about hiding the ball,” he said. “The purpose of a change in communications is to do one thing right, which is to get monetary policy right.”"}],[{"start":994.16,"text":"Data visualisation by Patrick Mathurin and Joel Suss"}],[{"start":1015.54,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1784986362_9596.mp3"}