ROI-Markets hear Greenspan echo as Warsh Fed goes quiet: McGeever

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Jamie McGeever

ORLANDO, Florida, June 23 (Reuters) - As the world marks the passing of former Federal Reserve Chair Alan Greenspan, who died on Monday aged 100, it's almost fitting that the U.S. central bank is entering a period of "less is more" when it comes to communications - something the "maestro" himself would have approved of.

Greenspan said many things during his 19-year tenure as Fed chair, but one remark to lawmakers in 1987 resonated more than most: "If I seem unduly clear to you, you must have misunderstood what I said."

New chair Kevin Warsh has made it unduly clear that he wants to steer the Fed away from its post-Global Financial Crisis path of forward guidance, "dot plots" and running commentary on the economy, moving back to the more opaque messaging of the Greenspan era.

While having 19 Fed officials make regular public appearances was always prone to creating too much noise and mixed signals, veering too far the other way risks creating a communications void. And voids tend to be filled with speculation, uncertainty, and, for markets, volatility.

It's therefore perhaps unsurprising that investors right now have as little visibility about Fed policy in the coming months as they have had at any point in the two decades since Greenspan stepped down.

CITI VS BOFA

The Warsh Fed will be very different from those presided over by Ben Bernanke, Janet Yellen, and Jerome Powell, as last week's policy statement and Warsh's first press conference indicated.

UBS's Jonathan Pingle warns that market participants should brace for a "communications vacuum" and figure out for themselves what information and signals from the central bank they should prioritize. "With less information provided, more care might be needed," he and his team wrote on Monday. "That may produce some trial and error."

That's already playing out. Analysts and investors are struggling to get a sense of what Warsh's lodestar is, a scramble reflected by a remarkable divergence in Fed rate calls between two of Wall Street's biggest banks.

Economists at Bank of America (BAC) on Monday said they now expect three 25-basis-point interest rate hikes this year. Previously, they had said the Fed would stand pat this year and ease twice in the second half of next year.

Meanwhile, economists at Citi, among the most dovish on the Street, are standing by their long-held call for the Fed to cut rates three times, although last week they pushed their timeline back by a month. They now predict 75 basis points of easing by January next year, as opposed to December this year.

The contrast between the two is remarkable: their respective views on Fed policy over the next six months or so diverge by a whopping 150 basis points. That would be a significant chasm over a 12- or 18-month horizon, let alone a six-month one.

FED TRANSPARENCY - AN OBLIGATION?

This divergence is understandable, however, given the mixed signals in today's economic data and the removal of forward guidance.

Those arguing for tighter policy make the simple point that inflation is too high. It has been above the Fed's 2% target for five years and is fast approaching 4%. The cost of money must rise to push inflation back to target.

The Fed's statement, staff projections and Warsh's press conference also tipped the balance for BofA's team, with all three indicating that the Fed's reaction function is likely to be more hawkish than it was under Powell's stewardship.

Meanwhile, Citi's economists insist the labor market is more important. It will notably weaken in the coming months, stoke disinflation, and pave the way for rate cuts. The only reason they pushed back the timing of these cuts is that they now believe it will take longer for Fed officials to reach that consensus.

Differing views are what make a market, right? And forcing investors to focus on analyzing economic data - not "Fedspeak" - may be exactly what Warsh wants.

But the transition for a generation of investors raised on a surfeit of Fed communication will be bumpy. Pricing assets, especially the front end of the Treasury market, may become a particularly fraught endeavor.

While Greenspan's "misunderstood" quote from 1987 is one of his most enduring, it's worth remembering that it was said semi-jokingly. He frequently lauded Fed transparency, which he said improved market functioning and enhanced the central bank's credibility.

"Openness is an obligation of a central bank in a free and democratic society," he said in 2001.

Warsh's view is that openness went too far, demanding a dramatic correction. We'll soon find out if he is right.

(The opinions expressed here are those of the author, a columnist for Reuters)

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(By Jamie McGeever Editing by Marguerita Choy)