- Key insight: The Fed's communications strategy, balance sheet management, inflation framework, data sourcing and productivity in the broader economy are the key considerations for Warsh's first year in office.
- Expert quote: "There's a race between supply and demand. Milton Friedman says that the only thing we know about economics is that there's a supply line, a demand line. They ultimately cross when they cross, and what are the implications for policy? The good news for you is, we have a task force for that." — Federal Reserve Chair Kevin Warsh
- Forward Look: Warsh is delivering on the regime change he promised to bring to the Federal Reserve. For financial markets, that will mean dealing with a less communicative central bank.
WASHINGTON — Federal Reserve Chair Kevin Warsh practiced what he has been preaching about central bank communication during his first public speaking appearance as chair: He said little, and made news doing it.
During his post-Federal Open Market Committee meeting on Wednesday afternoon, Warsh steadfastly refused to give forward guidance about how the monetary policy group might respond to changing economic conditions. But he had plenty to say about his objectives at the helm of the Fed.
Warsh said he will convene five task forces to explore the key pillars of his policy agenda: the Fed's communication strategy, its balance sheet management, its data sourcing, its framework for understanding inflation and how productivity and employment are impacting the broader economy.
"These subjects are timely, consequential, and in my view, worthy of a fresh look," Warsh said.
The task forces will be "independent" and composed of subject matter experts both inside and outside the institution, Warsh said, with support from Fed staff. The groups are being assembled now with an aim of having them operational within the coming weeks, he said, adding that he anticipates receiving recommendations from each of them by the end of the year.
Key items that will be evaluated include the Fed's various communications tools, such as the quarterly summary of economic projections, the minutes and transcripts from FOMC meetings and even the post-meeting press conference. Warsh declined to say which practices he would like to see changed or eliminated, but he said the other members of the monetary policy committee were open to reforms.
"I don't want to prejudge the outcomes there, but I'm pretty open-minded about what they could be," he said. "And I was just incredibly impressed over the last couple of days. My colleagues, over the last two days, and frankly, the first three weeks I've been here, we've been very open about changes."
Warsh's remarks came after the FOMC voted unanimously to leave the target range of the federal funds rate unchanged at 3.5% to 3.75%.
One change that is already in effect could be found in this week's summary of economic projections — also known as the dot plot — because of how the participants' various projections are displayed on a chart. Warsh did not partake in the exercise — which showed that nine out of 18 participants expect a rate cut by the end of the year.
During the press conference he said his nonparticipation was in alignment with his long-standing misgivings about the dot plot, namely that it sends counterproductive signals to markets and causes policymakers to remain committed to stances even as underlying economic conditions change.
Even so, Warsh said the quarterly forecasts will continue, at least until the task force recommends otherwise.
More broadly, Walsh argued that too much communication by the Fed has made markets dependent on the Fed's reaction function to adjust to economic conditions, when it should be the other way around.
"Financial market prices are probably the most important source of information to guide central bankers, but when all the financial markets are doing is reflecting back what we've said, then we're taking the most important source of information, and we're being blind to it," he said.
On the balance sheet, Warsh noted that potential changes include not just the
For now, the FOMC has reaffirmed its commitment to keeping the level of reserves above the minimum threshold for banks to transact and manage their own balance sheets comfortably.
On data, Warsh said the committee is open to "methodological changes" to its data gathering process, a potential nod to his argument that trimmed mean inflation — which cuts out price categories that rise or fall the most relative to overall indexes — is a better measure of price change.
"There are a lot of new data sources that we can learn from — the private sector, from reforms in the official sector, new analytic techniques that are far more refined than asking a simple question about whether something was core or noncore," he said.
Throughout the press conference, which lasted about 42 minutes, a common refrain for Warsh, when questioned about anything forward-looking at the Fed, was to highlight the fact that it probably fell under the scope of one of his task forces.
In one exchange, when he was asked whether a rise in artificial intelligence investment was more likely to raise aggregate demand in the economy through greater spending or through increased productivity, Warsh demurred.
"There's a race between supply and demand. Milton Friedman says that the only thing we know about economics is that there's a supply line, a demand line," Warsh said. "They ultimately cross when they cross, and what are the implications for policy? The good news for you is, we have a task force for that."
