The clarity gap at the Federal Reserve is now a credibility gap

At ten o'clock this morning Kevin Warsh will deliver his first keynote as chairman of the Federal Reserve, at the Kansas City Fed's annual symposium in Jackson Hole. The official theme is "Financial Innovation: Implications for Payments and Policy", which tells you almost nothing about why the assembled central bankers, fund managers and Treasury officials are listening so closely. They want one thing from the new chairman, and they have said so for weeks: clarity.

Mr Warsh has declined to provide it. Since taking office in May he has stripped forward guidance from the Fed's statements, ended the ritual of telling markets which way policy was heading, and created a network of task forces to rethink how the central bank reads data, measures inflation and runs its balance sheet. He has floated the notion that financial markets themselves should be the Fed's main source of information, and he defends the silence as discipline: markets, he has said, are finally "learning to play the ball, not the referee." The trouble is that investors cannot read the ball either. Where Ben Bernanke, Janet Yellen and Jerome Powell each arrived at Jackson Hole in their first year with a framework to explain, Mr Warsh is arriving with a question mark.

That question mark has a price, one already visible before he speaks. The 30-year Treasury yield has hovered near 5.3%, its highest since 2007, and the ten-year has climbed above 4.7%. Headline inflation, as measured by the Fed's preferred gauge, is 3.7%, a touch above forecast on data released on Wednesday, with core prices at 3.3%. Inflation has now run above the 2% target for more than five years. Meanwhile the policy rate sits at 3.50–3.75%, where the committee left it at both of Mr Warsh's first two meetings. A market that cannot read its central bank charges more for the decades of uncertainty it cannot insure against: the gap between a frozen short rate and a soaring long one is, in large part, the price of ambiguity itself.

To be sure, "clarity" is not a modest request. The market is asking for the Fed's reaction function — what would make it raise rates, and what would make it cut — at a moment when the honest answer is genuinely hard. The economy is strong, inflation is sticky, an oil shock from the war with Iran is adding to it, and the government is borrowing over $40trn into the highest long-term yields in a generation. Any chairman would struggle to give the crisp guidance markets crave. Yet Mr Warsh's deeper problem is not informational but institutional. Ambiguity is a stabilising strategy only when the referee is trusted. This referee is being watched by an audience that has seen the president pursue his predecessor with a criminal investigation that a federal judge called an improper campaign to force the Fed to cut rates, and which the Justice Department dropped only in April, clearing Mr Warsh's path. The same president appointed a chairman who had argued there was room for the Fed to lower rates — and who now presides over an institution whose own members are openly clamouring for a hike.

The cracks are showing inside the building. At the July meeting the vote to hold was 9–3, with three governors — including the usually dovish Neel Kashkari — voting for a quarter-point rise, the most dissents in favour of tightening in a decade. The Fed's own June projections pencilled in one hike by the end of the year. Yet the chairman will not say the word, so the market prices the guess itself: interest-rate futures put roughly a one-in-three chance on a move at the September meeting and call it a live possibility by December. When a chairman goes silent, other voices fill the void. The spectacle of a Federal Reserve whose individual members — and traders — do the communication is not the "less is more" that Mr Warsh promises; it is a less-is-less that raises the cost of borrowing for everyone.

The stakes for ordinary investors are the length of the yield curve. Money has been pouring into long-duration bond funds even as yields rose: the largest long-Treasury ETF took in about $4.4bn of net new money in the past month, an implicit wager that today's 5%-plus yields are a peak and that rates will eventually fall. Whether that wager pays depends on exactly the reaction function the chairman refuses to state. If the Fed must defend 2% with another hike, long-duration funds face more losses, richly valued growth stocks suffer, and mortgages — already near 6.75% — pinch harder; cash at the short end keeps paying a decent rate. If the Fed instead bends to fiscal need, whether by relitigating its inflation measures or by a new "Treasury-Fed accord", investors will extract the price in the long bond, and the dollar, as an inflation premium. Both roads lead through the same man.

The surrounding arithmetic makes the bind tighter. The Treasury has begun buying back its own long-dated debt — doubling those operations to $4bn apiece this month, with the purchases funded by issuing yet more short-term bills, even as bills already exceed the share its own advisory committee deems prudent — to flatten the curve it finds uncomfortable. Critics see the logic of populism: a fiscal authority leaning on a central bank, whatever the new chairman's intentions. Add a deficit heading toward $2.1trn and net interest of nearly $1trn already paid in the first ten months of the fiscal year, and the 30-year yield stops being a Warsh problem and becomes a national one.

None of this is resolved at ten o'clock this morning. A speech cannot promise that the fiscal-monetary system will hold, any more than it can call off the war or erase the debt. The clarity investors want — that the Fed still answers to its inflation mandate rather than to the government's borrowing needs — cannot be declared in Wyoming. It can only be demonstrated, in December, by a rate decision made into the teeth of a presidency that has shown what it does to Fed chairs who disappoint it. Mr Warsh has spent his first months telling investors to watch the ball, not the referee. For once, the advice is sound: judge the deeds, not the speech. A referee who will not officiate does not leave the game; he makes the players guess the rules, and charges them for the privilege.