Investors aren’t asking for rate guarantees; they simply want to know how the Fed will react to changing economic data. Your editorial “Warsh Makes Markets Do Their Job” (Review & Outlook, Aug. 1) defends Federal Reserve Chairman Kevin Warsh’s silence by dismissing “forward guidance.”

But Wall Street isn’t asking the Fed to promise a rate path. It simply wants to know the Fed’s reaction function. Market participants want to know how the Fed would respond to hotter inflation, a weakening labor market or an oil shock. Wall Street isn’t trying to steal signs, just to see the rulebook. This lack of clarity forces traders to price in both the data and the potential policy shift, heightening risk premiums. 1

With the Fed’s reaction function unknown, every bit of economic news and data now carries two uncertainties: what it says about the economy, and what the Fed will make of it. The latter is manufactured noise. No one expects the Fed to script an unscriptable future or tie itself to the mast. The uncertainty surrounding the Fed’s response amplifies market volatility and complicates investment decisions.

Consequently, market participants remain cautious, awaiting clearer signals from the central bank.