I recently had a letter to the editor published by the Wall Street Journal in support of Donald Luskin’s op-ed calling for an end to forward guidance—the practice by which central bankers try to use their public statements and forecasts to guide markets and consumers.

In the letter, I augment Luskin’s arguments with two recent and concrete examples of the failures of forward guidance.

Last September, rising inflation warranted holding the target range or a small increase. The Fed’s forward guidance communications had already signaled a rate cut and, not wanting to spook markets, the FOMC followed through with the cut despite prevailing data.

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September 11 marks one of the darkest days in US history. Terrorists murdered thousands of people on American soil, put countless people in fear for their safety, and left a scar in American history that can still be felt to this day. Yet what is less known is the financial surveillance that was expanded in the wake of the attack.

The Bank Secrecy Act already required banks and other financial institutions to report their customers to the government, but Congress decided that it wanted more. In the near blink of an eye, the USA PATRIOT Act was signed into law. At the time, the Cato Institute’s Robert A. Levy wrote that the law “zipped through in six weeks—gutting much of the Fourth Amendment in far less time than Congress typically expends on routine bills that raise no constitutional concerns.”

The damage to civil liberties caused by the PATRIOT Act is far-reaching. For just financial surveillance, the law mandated stricter customer identification (better known as know your customer, or KYC, requirements), expanded the list of financial institutions that must surveil customers, scrutinized foreign relations, created channels for more government officials to access this surveillance system, and made much of the system confidential from the broader public.

The Treasury Department has learned nothing from markets’ muted reactions to its bond price engineering schemes. Having doubled its long-end buybacks in August to at least $4 billion per operation, this week the Treasury unveiled a $6 billion operation in the 10- to 20-year sector, triple the normal size. Instead of lowering bond yields, as it was supposed to, the 10-year yield climbed to 4.85 percent, a three-year high, and the 30-year yield pushed back above 5.3 percent.

I wrote last month that unless the root causes of high yields are addressed, many of which originate in Washington, no amount of government financial engineering would help. Bond price manipulation cannot persuade markets to stop pricing government debt for excessive spending and inflation risks stemming from failed macroeconomic policies such as tariffs and the war in Iran. 

And that’s what happened again, only faster than before. In August, yields dipped for at least a day before recovering. This time they rose straight through Treasury Secretary Scott Bessent’s announcement. Around $6 billion per operation is no better than $4 billion when weighed against a $31.5 trillion Treasury market, and the market is no longer pretending otherwise.

This week, the Treasury Department, under Secretary Scott Bessent, announced it would at least double the size of its long-end buyback operations, lifting the ceiling from $2 billion to at least $4 billion per operation. This decision was in response to a further climb in the 30-year yield to its highest level since 2007. Yields initially dipped on the news—as the Treasury would have hoped—but then markets erased nearly the entire drop within a day.

To run a buyback, the Treasury purchases longer-dated Treasury bonds and funds the purchases by issuing short-term Treasury bills, swapping long-term government debt for short-term government debt, and removing the long-term bonds from private hands. 

As the Federal Open Market Committee meets this week, the more telling story may be Chairman Kevin Warsh’s approach rather than the FOMC’s rate target decision. If his first meeting is any guide, he will say as little as possible; he has already declined to provide his own rate projections for the dot plot and significantly curtailed forward guidance. That restraint is deliberate, and it previews a far larger project. Warsh has launched five task forces to review how the Fed communicates, manages its balance sheet, uses data, understands productivity, and fights inflation.

Conducting a thorough review of monetary policy was the first recommendation we made when Warsh took office. The Fed adopted its flexible average inflation targeting regime in 2020, promised to let inflation run hot to make up for past shortfalls, and then presided over the worst inflation in four decades while calling it transitory. When the Fed ran its scheduled framework review in 2025, it revisited the wording of its consensus statement and little else. The five task forces are, in effect, the review that should have happened last year.

A new Cato briefing paper, released today, summarizes the best possible outcomes from this review. It works through each task force in turn, identifying the underlying problem and the reform that best addresses it. The recommendations differ in their particulars, but nearly all of them point in the same direction: The Fed serves the public best when it does less, not more. A well-functioning central bank commits to clear rules, holds a smaller footprint in financial markets, and leaves more room for prices and private information to do their work.

Communications is the cleanest illustration, and this week puts it on display. After 2008, the Fed came to rely on forward guidance, telling markets in advance what to expect and building an elaborate signaling apparatus around it. The goal was predictability, yet the result was often the opposite. Markets and incoming data usually offer a better real-time read of the economy than the Fed’s own forecasts, and guidance can drown out those signals. In September 2025, the data pointed to holding the rate target steady or even hiking, but the Fed had so firmly telegraphed a cut that reversing would have shocked markets—so it cut anyway, despite prevailing data.

Warsh’s instinct to say less is therefore a step in the right direction. If this meeting follows the pattern of his first—a shorter statement, little forward guidance, few clues about the path—that restraint is welcome. But restraint alone is fragile; it lasts only as long as the chairman who practices it. The durable fix is to replace discretionary communication with a rule. The Fed should publish its reaction function—a transparent formula linking its rate decisions to observable conditions—and let that stand as its communication. Predictability would then come from the rule itself, not from parsing a chairman’s silence, and forward guidance in its current form would become unnecessary.

The same logic runs through the rest of the paper. A balance sheet that ballooned past comfortable limits should be shrunk and simplified. A central bank that leans on slow, heavily revised government data should make room for faster private sources. A framework that bases policy on speculative productivity forecasts should instead rest on a rule. In each case, the reform narrows the Fed’s discretion and widens the space for markets and rules to operate.

None of this assumes the Fed can deliver perfect outcomes. It cannot. But a Fed that is more predictable, more accountable, and less intrusive than the one we have is a welcome step in the right direction.

Every few weeks, fresh speculation emerges about when the Federal Reserve will change its interest rate target, followed by confident claims that this decision will drastically alter the mortgage, auto, or credit card rates that weigh on American households. The assumption beneath the coverage is that the Fed sets the cost of borrowing, so its next move matters more than anything else. People don’t want to hear that the Fed matters less than “everyone” thinks, but at the very least, the past seven months are enough to question exactly how much the Fed controls rates.

The Fed has held its rate target steady since its December cut. But as this table shows, nearly every rate Americans actually borrow at has climbed over the same stretch.

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New Fed Chairman Kevin Warsh testified before the House Financial Services Committee and the Senate Banking Committee last week, delivering the Fed’s semiannual Monetary Policy Report. Both sessions covered important topics: a favorable June inflation report that Warsh declined to treat as “mission accomplished,” the Fed’s retreat from forward guidance, and pointed exchanges over the Fed’s independence from the White House. But an outsized share of the questioning, especially in the Senate, went to artificial intelligence (AI), leaving some key questions about the state of monetary policy unasked.

Obviously, the Fed has no direct control over how AI evolves. But senators pressed Warsh on whether the AI investment boom is inflationary and on the financial-stability risks posed by the newest AI models. His answer was that AI-driven price increases need not be inflationary, because supply should eventually catch up, and he described the internal Fed debate over AI spending as “one of the good family fights.”

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