The new president of the Fed is undertaking an overhaul of the methods for measuring inflation and productivity, in response to economic and technological transformations, while reaffirming the 2% inflation target.
Kevin Warsh, the new chairman of the American Federal Reserve (Fed), gave his first press conference on Thursday. He was not content to announce the maintenance of rates in the range of 3.50% to 3.75% reached in December, to reaffirm the institutional target of 2% inflation and to publish inflation projections revised upwards, to 3.6% at the end of the year. He also initiated an overhaul of the Fed’s methods in terms of monetary policy, unveiling the creation of five working groups (or “task forces”) responsible for rethinking the institution’s practices, particularly on the measurement of inflation and productivity.
Five working groups for an in-depth overhaul
These five groups will bring together “the best minds” at the Fed, economists and non-economists. Their work will begin within two weeks and should, for the most part, result in recommendations before the end of the year, assured Kevin Warsh. “These last few weeks have been rather warm”, with colleagues who want to “return to fundamental principles” to rebuild the institution, he welcomed.
The first group concerns Fed communication. The new president judges that the institution has become too talkative in recent years, particularly in terms of orientation, or “guidance”, these little stones that central bankers sow to help the markets anticipate the next monetary policy decision. “Since last summer, my colleagues have been discussing possible improvements to the form and function of communication. This new team will build on this and I expect it to propose some well-felt changes, including on economic projections,” he said.
On Thursday, these projections were published as usual, except that Kevin Warsh did not participate in the transparency exercise on individual rate movement predictions. Only 18 members of the monetary policy committee spoke anonymously. Nine of them now expect an increase by the end of the year, compared to zero in March. For the new president, by providing guidance, the Fed is giving its response to the markets when it should be listening to them: “financial markets are probably the most important source of information to guide central bankers,” he said, vowing to let the markets “look at the data” and “remove the blinders” from the Fed.
Incidentally, Kevin Warsh tackled his predecessor Jerome Powell on the Fed’s communication about inflation, which has been above its target for five years: “the commitment to reaching the target is strong, unanimous and unambiguous. I think it’s an important message that we’ve been missing for five years, and we’re going to fix that,” he said.
The second group is devoted to the financial balance sheet of the Fed. Kevin Warsh would like to reduce the stock of assets stored by the bank, which he considers to have been insufficiently reduced since the explosion caused by the great financial crisis. The team will weigh the benefits and risks of large reserves, as well as their composition, before proposing “an alternative framework for the conduct and implementation of monetary policy.”
The third group will evaluate new information sources and other collection methods, to “give policymakers information about the state of our economy that will be more accurate, more relevant, fresher and, perhaps most importantly, more actionable.” Kevin Warsh called the national studies used by central bankers and ministries “outdated”: “It looks very little like the American economy in 2026,” he said, pointing to low survey response rates and questions inappropriate for this century. According to him, business owners have access to real-time information that is less subject to revision than national public data. “What interests us is what’s happening now. We’re less interested in the echoes of history,” he said. Last year, labor market statistics were drastically revised, which can be explained in part by workforce reductions, then by the freezing of government credits for forty days.
Artificial intelligence and productivity at the heart of reforms
The fourth group will look at employment productivity “in an era of transformation”. This involves studying “the pace, extent, and economic impact of new general-purpose technologies, including artificial intelligence, and examining what this implies for the Fed in accomplishing our missions on employment and inflation.” AI “is perhaps the most important change for the economy, businesses and households since I entered adulthood,” said Kevin Warsh, who is not the only one on the committee to think that, “in the long term”, it will benefit the United States. He sees it as a factor of “non-inflationary growth”, because it will lead to considerable productivity gains which will keep wages and prices under control.
Finally, the fifth group will work on how to understand inflation. It will first have to dissect the main factors of price increases, starting from scratch and without prejudice, then propose a new range of tools “to ensure price stability in a changing economy”. Kevin Warsh has already indicated that he prefers adjusted indicators, which cut out inflation peaks concentrated on certain products: he does not want to dwell on price “bumps” and judges that the trend of the last three or six months is more important than the last figure. In this era of transformation, the new president prefers to look far ahead.
