Former Federal Reserve Vice Chair Richard Clarida has warned that altering the central bank's preferred inflation gauge without transparent communication about policy objectives could heighten market uncertainty.

This comes after Fed Chair Warsh stated the institution would explore alternative inflation measures to the current Core Personal Consumption Expenditures Price Index (Core PCE).

"They could choose to adopt an average metric instead of fixating on a single index, or they could look at the CPI or PPI鈥攖here are many options," Clarida said.

"A central bank operating under an inflation-targeting regime must be crystal clear about which target it is actually tracking. That target can change and evolve over time, and that is very important."

Core Issue Under Warsh's Tenure: Reducing Forward Guidance, but Markets Crave More Signals

Clarida's remarks on the Fed's communication style strike at the heart of policy debates since Warsh succeeded Powell.

Warsh aims to reduce the use of "forward guidance" to avoid influencing markets by pre-signaling future interest rate paths. However, in the absence of clear policy signals, Wall Street has begun interpreting the Fed's stance on its own.

For instance, after this Wednesday's Fed meeting, fears of rekindled inflationary pressure triggered a sharp spike in 30-year Treasury yields.

"The market's reaction during the press conference was probably not the outcome the Fed was hoping for," Clarida noted.

Treasury Sell-Off Reflects Market's Lack of Understanding of the Fed's Reaction Function

Clarida attributes the significant volatility in the Treasury market to the Fed's deliberate policy ambiguity.

He argued that without forward guidance, "the market must develop a broader understanding of the Fed's reaction function."

Previously, the Fed held the federal funds rate steady in the 3.5%-3.75% target range, though three officials voted for a rate hike.

Clarida Endorses the 'K-Shaped Economy' View of the US

On the macroeconomic front, Clarida endorsed the characterization of the US economy as a "K-shaped" recovery.

He stated that the divergence between the two branches of the US economy has been widening over the past six to seven years.

Approximately 60% of Americans, who own homes and hold equities, have benefited from rising stock markets and asset price appreciation. In contrast, the remaining 40%, who primarily rent and hold fewer equity assets, have not fully shared in the wealth gains from asset appreciation.

Clarida believes this economic divergence is becoming a crucial factor in understanding US consumption, wealth distribution, and the transmission effects of monetary policy.