The Five Fed Task Forces

This past May, Kevin Warsh took the helm as the 17th Chair of the Federal Reserve. He is eager to make some changes in policies and procedures regarding the Fed’s current approach to monetary policy. He believes an overhaul is needed because past policies are responsible for current inflation, which has been above target for more than five years.

He has created five task forces to carefully consider whether policymakers’ methods, analytical tools, and policy approaches can be improved.

The goal is straightforward: to ensure that the Fed is best positioned to achieve its objectives in this consequential time.

Each of the task forces is being led by prominent academics, former central bankers, and well-established business leaders. All of them have deep expertise in their fields. They are experienced and thoughtful, and understand the nuances.

Let’s look at some slides.

Chart 1, 1:37– The five task forces are: Communications, balance-sheet policy, data, productivity and jobs, and, finally, inflation frameworks.

Chart 2, 1:37– Each of these five task force slides includes the objective. If of interest, also included are the three external advisors who will work with the Fed staff. Also included are their current jobs or what they are best known for.

Regarding communication, Kevin Warsh believes Fed policymakers currently communicate too much. There are 18 members of the FOMC, all with their own opinions.

For a little history on Fed communications, the Fed used to be very opaque. It wasn't until 1994, when Alan Greenspan was the Chair, that the Fed announced its rate decisions following the meetings. Before then, Fed watchers monitored the money markets to see whether the Fed had changed policy and by how much. Then, during the global financial crisis, Ben Bernanke really increased transparency. In 2011, he started holding press conferences after each FOMC meeting; in 2012, he began publishing the dot plots for future expectations of the federal funds rate; and in 2012, he formally set 2.0% as the inflation target.

Kevin Warsh believes the extra transparency was needed at the time, given the severity of the economic downturn. The public needed to know that interest rates would remain low for a long time. But in times like we are experiencing now, he believes the Fed should spend more time getting policy right.

Chart 3, 2:58– Warsh is not a fan of the large-sized balance sheet that the Fed is running. So he wants it investigated. There is a belief that the large balance sheet causes distortions in the financial markets. For example, some economists believe the Fed’s massive buying of Treasury securities during the pandemic pushed down longer-term interest rates, including mortgage rates. This caused demand for homes to skyrocket, putting upward pressure on home prices. In 2021, home prices jumped 21%, well above the long-term average of 4.3% annually.

Chart 4, 3:19– Here is a chart of the size of the Fed’s balance sheet since 2000. It was just $900 billion prior to the start of quantitative easing. The Fed continued buying bonds, which added reserves to the banking system, until 2018, when the economy normalized, and they could start reducing the size of their balance sheet. Then the pandemic came, and the Fed quickly doubled the balance sheet to $9 trillion. Then, four years ago, when the economy normalized, they began reducing the size again.

The Fed has kept the balance sheet large, which means there are a lot of reserves in the banking system. All that money sloshing around in the banking system allows for plenty of liquidity to handle the day-to-day needs of the financial system. This reduces the number of times the Fed has to add or drain reserves in the market to keep the funds rate steady.

Chart 5, 3:19– Data: For the Fed, it's all about the data. They need accurate and timely data so they can decide on the appropriate level of monetary policy changes. They address the limitations of some government data that rely on old-fashioned surveys that have declining response rates and large revisions. They will also examine the use of private-sector data that uses real-time information.

Chart 6, 3:19– Productivity and Jobs: This is an exciting task force in terms of objectives and members. They will assess how technological improvements, like artificial intelligence, will impact the economy, most notably with inflation and employment.

Chart 7, 3:19– Warsh often talks about the increase in labor productivity in the late 1990s and early 2000s when the internet was new, which brought rapid advancements in information technology, including spreadsheets and word processing. Higher levels of productivity can help keep a lid on inflation.

Chart 8, 3:19– With inflation above its target rate of 2.0% for more than five years, this is an important issue for the Fed.

This group will analyze the key drivers of inflation. They will also recommend a wide range of ideas on ways to ensure price stability.

Chart 9, 3:19– Measuring inflation is tricky, since there is no single way to measure it accurately. This chart shows the annual change in inflation for many of the inflation measurements that Fed policymakers look at to understand what is causing inflation and how long those pressures may last.

Warsh has talked several times about finding a different measurement of inflation that the Fed should follow.