New Federal Reserve Chair Kevin Warsh wasted no time in making his mark on the Federal Reserve’s processes. Pivotal on his reform agenda, is the abandonment of the Federal Reserve’s forward guidance, a multi-decade tradition at the Federal Reserve since the pre-GFC days of Alan Greenspan. In reaction, economists, strategists, and portfolio managers from major institutions as Pimco, Lord Abbett, T. Rowe Price, JP Morgan, and The Conference Board are all on the record that the end of forward guidance will increase market volatility. The Financial Times, Barron’s, Forbes, WSJ, AP, Washington Post, and Axios added to the kerfuffle with attention grabbing sound bites such as “Warsh’s gamble”, “market yips”, “uncertainty”, and “lift US borrowing costs.” One financial outlet even went as far as to proclaim that Warsh was “deliberately restoring volatility and risk premiums to the yield curve.”1 In his first press conference, even Chairman Warsh did not refute these claims that forward guidance might increase market volatility.
We were sympathetic to these arguments and were prepared to write about how asset allocators should position their portfolios in response to the new expectations of volatility. To answer that question, we scoured the extensive academic and market literature over the preceding decades to unpack the links between forward guidance and volatility. Despite our own best efforts to unearth the data to best serve our own confirmation bias that ending forward guidance would increase market volatility, we could not find data that supported our (and much of the financial establishment’s view).2 Indeed, there is a paucity of empirical data on the topic at all. It appears that for all of the confident pronouncements by the various market observers over many years and especially this year, none (that we found) cite any empirical data, studies, or research to support their assertions that forward guidance reduced market volatility, nor could we find any such data elsewhere in the historic academic or market literature.
What we did find, is some limited evidence that in the narrow scope of periods where interest rates are already near the zero lower bound (which is obviously not relevant to today’s environment), that forward guidance can lead to lower rates further out the curve. But even in those limited situations, there is no empirical evidence that forward guidance decreases market volatility. There are scores of speeches and quotes from central bankers and market participants in vociferous support of that assertion, but no empirical evidence to support those claims, despite decades of experience in this policy framework. In fact, our review of literature, if anything, implies the opposite. Specifically, that the presence of forward guidance amplified market volatility around key episodes of changes in forward guidance, especially around the post-pandemic inflation spike of 2021-22, or what became known as the “taper tantrum” in 2013. The same could be observed during what many consider the introduction of forward guidance in 2003. Perhaps the most directly relevant analysis on the Fed’s forward guidance that we found is that the Fed’s forward guidance has been lousy at predicting their own future rate moves. While others have made this claim, Economist Benn Steil at the Council of Foreign Relations summarized it well in January 2025 with the following chart (see Chart 1).
What Evidence Does Exist
But to say that the consensus on future volatility is unfounded in the data does not mean that this change at the Fed will not yield some changes in the market. Of course, the very fact that the market expects higher volatility going forward may become its own self-fulfilling prophecy, certainly in the near future. But we think the most important outcome for allocators does have some partial basis in the empirical data.
In our review of the research, we found a 2019 study by the ECB3 that looked at the effects of forward guidance as used by the central banks of Canada, the Euro area, Japan, Sweden, the UK, and the U.S. in periods where policy rates were at or below 1%, prior to 2016. While the applicability of findings from that period to today’s higher rate environment is somewhat limited, it may offer some directional insights. The study first divided the sample into different regimes of forward guidance as “open-ended” (essentially vague qualitative statements), “data-based” (policy paths contingent on quantifiable economic outcomes), and “calendar-based” with explicit date targeting. Then it sought to measure the disagreements among professional economic forecasters for one-year-ahead forecasts for 3-month rates under each regime (Chart 2) as well as the responsiveness of 2-year government bond yields to macroeconomic news (Chart 3).
The findings help explain the paucity of empirical support for the consensus claims of forward guidance on market volatility. In both cases, general open-ended guidance has no discernible effect. Data-based forward guidance essentially cuts “the beta” of the market response in half, and long-dated calendar-based forward guidance essentially eliminates either the dispersion of forecasts or any market reaction. But short-dated forward guidance (less than 1.5 years) slightly amplifies the dispersion of forecasts and significantly amplifies the magnitude (volatility) of the market response on government bond yields from standard macroeconomic news to almost 2.5x the estimated baseline if no forward guidance had been given!
For context, the Federal Reserve’s own itemization of historical guidance (see Chart 4) would generally fall into the “open-ended” portion of the ECB’s rubric, thus generally having no consistently measurable effect according to those findings. During some periods from 2011-2013, the Fed did use what would be labeled “calendar-based” forward guidance, occasionally greater than the 1.5-year threshold set in the ECB study. But its guidance was typically shorter than this horizon.
Market Implications
Our takeaway is that the end of forward guidance will revert the market to paying more attention to economic fundamentals. Data surprises will again become more important than Fed speak, and the explosion of alternative, real-time leading indicators of data will become more important tools in market forecasters’ toolkit. In terms of volatility, we think the net effect of the end of forward guidance will simply be to disperse volatility from the Federal Reserve back into the hands of economic and market forecasters. Those forecasters with the best and most consistent skill at identifying turning points in the data ahead of the consensus will be rewarded. The ability to be directionally nimble will be more important than the ability to hedge large magnitude “Fed pivots”. Indeed, while they buried this analysis in a misleading subtitle proclaiming, “Less Guidance, More Volatility”, among the research we scoured for this analysis, the folks at Sage Advisory may have come closest to the mark in saying “Less information from the [Federal Reserve] committee shifts the burden of price discovery onto the market and should raise rate volatility around key economic releases like CPI and payrolls.”4 But whether market volatility will be generally higher under the Warsh Fed, we – like the new Fed approach – will have to wait for the data to decide.
- https://m.markets.com/research/fomc-june-2026-warsh-forex-impact
- If you have that data, please send it to us!
- https://www.ecb.europa.eu/press/research-publications/resbull/2019/html/ecb.rb190730~75475a548a.en.html
- https://www.sageadvisory.com/article/the-fed-says-less
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