Fed Warsh: Open To Change The Fed's Ways of Conducting Monetary Policy

During the June 17 press conference after the FOMC meeting, the new Fed Chairman, Warsh, announced the establishment of five task groups. These groups will address various topics, such as Fed communications, balance sheet policy, inflation framework, employment and productivity, and data sources that assist policymakers. The proposed changes to policymakers' practices could significantly affect how the Fed plans to achieve its objectives, compelling Wall Street to adapt to a new approach.

Fed Communication: Policymakers usually prioritize items based on their significance, which is why Fed Warsh considers Fed communication as the foremost concern. Fed Warsh has publicly stated that the "Fed" communicates excessively and too frequently. A notable shift in Fed communication was evident during his initial FOMC meeting. The press release was short, with no forward guidance, and Fed Warsh did not engage in offering forecasts for growth, unemployment, inflation, and policy rates. It wouldn't be surprising if the Fed decides to drop the "dot plot" and "forward guidance" in upcoming meetings. Wall Street might protest, but how many companies receive a "roadmap" every six weeks? Reducing risk and speculation in the financial markets is a good thing.

Fed's Balance Sheet Policy: Fed Warsh has long argued that the Fed's balance sheet is too big. It is unclear if Mr. Warsh would change the size, composition, or both, but he wants to reduce the Fed's footprint. At the June press conference, when asked if he thought Fed policy was restrictive, he argued if you look at what is happening in the financial markets, it is hard to say policy is restrictive. Financial markets run on liquidity, and Fed Warsh thinks the Fed balance sheet is providing too much liquidity.

Existing Data Sources: Fed Warsh attempts to imitate former Fed Chairman Greenspan in various aspects, yet unlike Greenspan, who was a "data junkie," Warsh does not share this trait, particularly regarding economic data. Fed Greenspan spent a lifetime studying microeconomic data and was a big fan of survey data from the purchasing managers and others. However, the most reliable and hardest data originates from government statistical agencies, including the Census Bureau, Bureau of Labor Statistics, and Bureau of Economic Analysis. If Mr. Warsh wants to get a more accurate account of the economy, he would be wise to ask Congress to increase funding for the statistical agencies.

Productivity and Jobs: Mr. Warsh is of the opinion that "AI" will have a positive impact on output, employment, and productivity, although the extent and timing of these benefits are unpredictable. If Fed Warsh takes a similar approach to Mr. Greenspan, he will allow the economy and financial markets to guide him.

Inflation Frameworks: Mr. Warsh has argued that "trimmed inflation" measures offer a better guide of underlying inflation versus widely used "core measures". Yet, if Mr.Warsh is serious about revisiting inflation frameworks, then there should be a serious discussion about inflation measurement. The Fed's price target, the PCE deflator, is not a direct measure of inflation, as nearly a third of it comes from non-consumer, non-market prices. The CPI has its flaws, and both measures include an implied rent series for homeowners. Price statistics need to be relevant, objective, and reflective of people's actual experiences. Currently, price measures do not meet these standards.

As Mr. Warsh stated, a change in leadership is a "timely opportunity to review current practices" and review what still works and what should be changed. Wall Street must adapt as the operation of monetary policy could change significantly under Fed Warsh's leadership.