Kevin Warsh’s first press conference after the June 16-17 FOMC was keenly awaited to get a read on what his term as Fed chair was going to look like. The issuance of the FOMC meeting statement and summary of economic projections (SEP) at 14:00 ET on Wednesday was the first signal that things are going be different. The FOMC left rates unchanged at 3.50 to 3.75 percent.
The meeting statement was truncated from recent practice and all language regard forward guidance was removed beyond affirming “its policy of maintaining ample reserves in the banking system” and commitment to price stability. For those who pay close attention to the SEP, there were 18 points on the dot plots, not the usual 19.
When Warsh took the podium at 14:30 ET, he was forceful in asserting that the FOMC was “unambiguous and unanimous” in its determination to fight inflation. He also noted that the FOMC agreed that at present, the provision of forward guidance on policy was “not well-suited to the current policy conjuncture”. He also revealed that it was his dot missing on the forecasts which is unsurprising given previous comments regarding the utility of the SEP.
Warsh is jumping into reforming the Federal Reserve “in each of five areas that are central to the broad conduct of monetary policy”. He announced the formation of “independent task forces” inclusive of private sector participants as well as Fed staff. The results are expected to be reported in the coming months and changes implemented by year-end.
Market reaction to the hawkish tone and sweeping changes was decidedly negative and essentially wiped out the lukewarm positive reaction to the memorandum of understanding with Iran.
Concerns about five tasks forces’ impact are across the board. In particular, markets may be worried that Fed communications policy will change significantly. While Warsh would like market behavior to be less tied to Fed guidance, markets have liked less opacity in monetary policy. It is possible that the routine press briefings after the FOMC meeting may not continue. Warsh indicated that it may not be useful to hold a briefing is there is essentially no change in policy.
Warsh spoke about keeping the ample reserves policy in place, but it seems probable that “alternative frameworks” will be under discussion and receive favorable attention.
The task force to “evaluate new information sources and consider methodological changes to improve data gathering” could have far reaching effects. A greater reliance on private data – which generally has less history and less stringent controls over adjustments – is likely. Warsh would like to include the data with higher frequencies to inform current monetary policy decisions, but it also could mean reacting to short-term movements rather than taking the long view, and consequently more volatility in setting the fed funds target rate range. It could also mean that the Fed has more influence over decisions at the federal statistic agencies which would lead to changes in data collection and reporting.
The task force on productivity and jobs could help deepen the understanding of new technologies on the workforce and ensure the FOMC is better able to fulfill the mandate for maximum employment.
The task force on inflation frameworks could lead to a more refined ability to determine fundamentals in accurately measuring inflation for the short-, medium, and long-term. Importantly, Warsh did say the 2 percent inflation goal is not going away. However, it seems probable that how the Fed conveys its assessment of inflation and inflation risks may be altered.
Taken together, Fedwatchers are going to be on edge parsing any comments from Warsh not only for the direction of monetary but for changes in how the Fed conducts itself.
