New Fed Chair Kevin Warsh Sparked a "Credibility Shock" on Wall Street After His Latest Rate Decision. Here's Why Investors Should Care.

Under previous Fed Chairs, guidance was provided to avoid economic uncertainty.

New Fed Chair Kevin Warsh believes a little more uncertainty would be a good thing.

New Federal Reserve Chairman Kevin Warsh is upsetting Wall Street. But he's doing it on purpose, changing a dynamic that has been in place since the turn of the century. The switch has investors crying foul and questioning the Fed's credibility. There's a lot going on here, and investors definitely need to understand what's happening. Here's a quick look.

At the turn of the century, the bursting of the dot-com bubble caused a massive market shock. In response, Fed Chairman Alan Greenspan began providing forward-looking statements to soothe the market. During the Great Recession, one of the deepest economic downturns in history, Greenspan's successor, Ben Bernanke, began providing even more explicit guidance. That level of guidance remained in place until this year, when new Fed Chair Kevn Warsh started to pull back on the guidance.

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Wall Street doesn't like change, so investors are upset. And this change makes it harder to forecast the future, which is a key part of making investment decisions. Some of the pushback is just a reaction to the new approach.

But Warsh has a reason for what he's doing. The market has come to rely on what is known as the "Fed put," the belief that the Fed will step in to save it. That encourages risk-taking behavior that likely wouldn't occur without the so-called Fed put. Warsh appears to believe that providing less guidance will force investors to make better long-term investment choices.

That said, there's another piece of the puzzle. Before stepping into the role as Fed Chair, Warsh was outspoken about wanting to lower interest rates. That is what the President would like to see happen, as he has said publicly many times. Only inflation is running hot right now, which would normally result in interest rate increases. That rates were not increased at the last meeting has some on Wall Street questioning whether or not Warsh is trying to avoid a rate increase to appease the President.