Former House Financial Services Chair Jeb Hensarling Reacts to Warsh at Jackson Hole

“After the financial world came to a standstill this morning to listen to Kevin Warsh’s speech, a sign of his ultimate success might be that during next year’s Jackson Hole conference we all find ourselves reading the sports page instead. In other words, markets should independently look at economic data and already know what the Fed’s reaction function will be.

“People shouldn’t have to parse his every word. He’s correct that forward guidance needs to go but it leaves a void that needs to be filled. Today he failed to fill the void and so we’ll have to listen to more of his speeches for the time being.”

“To fill the void, Warsh had the opportunity to fully embrace monetary policy rules today but unfortunately he didn’t do so. He acknowledged them, praised them, and perhaps flirted with them, but he clearly failed to embrace them, and it doesn’t appear that he will. The list of principles he laid out were most encouraging but still leave a little too much to the imagination.”

“It was particularly encouraging to hear a Fed chair actually acknowledge that the money supply matters and that extraordinary tools need to be reserved for extraordinary times. It would have been nice to hear some long term commitment to shrink the Fed’s balance sheet. It was a noticeable absence.”

“Again, we should all look forward to the day when, except for rare occasions, we clearly know ahead of time what the Fed’s reaction function will be. After today’s speech the jury is still out on if and when that day will come.”