Warsh’s quieter Fed pushes Wall Street toward AI policy tools

Wall Street firms are preparing for fewer public clues from the Federal Reserve after Chair Kevin Warsh began changing how the central bank communicates policy. The shift has prompted some investors to use artificial intelligence and other tools to interpret a Fed whose decisions can move rates, bonds and equities within minutes.

F/m Investments, which manages exchange-traded funds linked to inflation and U.S. Treasurys, has released an AI tool called WarshGPT. The firm said the system reviews nearly 1,800 documents and transcripts tied to Warsh to help users assess how he has approached economic and monetary-policy questions.

Alexander Morris, chief executive of F/m Investments, told CNBC that his firm has built part of its business around interpreting central-bank language. Warsh’s move toward less forward guidance, he said, means investors need new ways to read the Fed’s policy reaction function.

Gary Richardson, a former Federal Reserve historian and now an economics professor at the University of California, Irvine, told CNBC that investors will seek any available method to infer what policymakers may do when official guidance is limited.

A shorter message from the Fed

Warsh took over as Fed chair in May and has started an overhaul of the central bank’s public communications. One of his task forces is focused on how the Fed shares information with the public and markets, CNBC reported.

The June Federal Reserve policy statement, the first issued under Warsh, contained about 130 words, according to a CNBC analysis. Recent prior statements had exceeded 300 words. Warsh described the statement as shorter and simpler and said it deliberately omitted forward guidance.

UBS said Warsh devoted 5% of the sentences in his first post-meeting press conference to policy-relevant subjects. The bank said that compared with 27% for an average meeting under former Chair Jerome Powell.

Fed communications affect markets because investors use them to estimate the likely path of the federal funds rate, the overnight benchmark that influences short-term borrowing costs and feeds through to Treasury yields, credit pricing and currency markets. Forward guidance, when used, gives markets a public view of how policymakers expect to respond to inflation, employment and growth data.

AI and dashboards enter the Fed-watching process

F/m Investments built WarshGPT using Anthropic’s Claude model, despite the product’s reference to OpenAI’s ChatGPT, CNBC reported. The tool cost less than $1,000 to create and took about two weeks from inception to release, including testing by a group that included former Fed officials and newsletter writers.

The firm said the tool draws on Warsh’s communications as well as economic and political history. F/m also set limits on its use: the bot does not speak as Warsh and does not provide forecasts or forward-looking policy statements.

UBS has its own interactive dashboard for clients that tracks the Fed’s policy tone. Elena Amoruso, a strategist at the Swiss bank, told CNBC the system is designed to give clients an unbiased assessment of Warsh’s meeting commentary. After Warsh’s first policy meeting as chair, Amoruso told clients that his policy-relevant comments were overwhelmingly hawkish, citing his views on the labor market, growth and inflation.

David Kelly, chief global strategist at JPMorgan Asset Management, told CNBC that if the Fed ends certain releases, such as the dot plot of officials’ rate projections, his team would study more speeches by Federal Open Market Committee members to assess how they may vote. Kelly also said major communication changes would probably take several months to announce and put in place.

More uncertainty around policy signals

Some investors expect reduced guidance to produce larger moves around Fed meetings and public remarks. Steve Friedman, a former New York Fed official and now senior macroeconomist at MacKay Shields, told CNBC that less communication about the Fed’s reaction function would be negative for the economy, while also creating potential opportunities for investors with a strong framework for monetary policy analysis.

Friedman said he would watch Fed Governor Christopher Waller more closely if Warsh reduces public appearances, describing Waller to CNBC as a bellwether for the committee. Waller said this week that the Fed should not focus on fighting the last war on inflation, while adding that rate increases could still be possible.

Market expectations remain divided. CME’s FedWatch tool showed fed funds futures traders pricing an almost 59% chance of a September rate increase. Kalshi traders, by contrast, viewed no change in rates as the most likely outcome for that meeting.

Richardson told CNBC that ordinary investors may find it harder to understand Fed policy as communication becomes less explicit, while larger firms may spend more to hire former central-bank officials who can help interpret a lower-transparency Fed.

This story draws on original reporting from CNBC.