Fed monetary policy: Rates haven’t changed, but something else has

Though the US Federal Reserve kept rates unchanged at the conclusion of its monetary policy meeting on Wednesday, signs of a regime change were difficult to ignore.

As was widely expected, the FOMC maintained its benchmark overnight borrowing rate targeted in a range of 3.5%-3.75%. But what surprised the markets was Warsh launching an overhaul of the Fed operations that could completely change the way the central bank operates.

New task forces

Warsh announced the establishment of five task forces that will assess the “broad conduct of monetary policy”, including the dot plot and quarterly projections, the $6.7 trillion balance sheet, communications, data sources, inflation framework, productivity, jobs and the impact of artificial intelligence (AI).

“Each task force will serve an objective shared by everyone around that table that I sat with over the last couple of days – a Federal Reserve that is clear-eyed about its mission, fit for purpose, and focused on the future,” Warsh said.

Warsh expects the task forces to begin work in the next couple of weeks. The groups will examine current practices, consider alternatives, and ultimately propose next steps for policy-maker consideration. Warsh noted that he would enlist “some of the very best minds, both inside and outside the economics profession” for the groups.

“And we'll start to get some more information from them, some more framing of how they see things, starting in the fall, and hopefully most, if not all of them, concluding by year-end,” he added while speaking at the press conference.

Shorter policy statement

In the past, Warsh has repeatedly criticised the way the Fed communicates and argued that it could lead to policy errors.

In a corrective step, FOMC’s monthly policy statement this time was notably shorter compared with the previous statement. According to a CNBC report, the statement released on Wednesday contained around 130 words, down from figures above 300 recorded in recent meetings.

Warsh acknowledged the “difference” in the statement early in his first press conference.

“It’s a bit shorter, a bit simpler, and it dispenses with some older language,” Warsh said. “That statement just gives you the facts, as best we can judge them.”

No forward guidance

Warsh also announced that the central bank will drop forward guidance on monetary policy.

“I think financial markets perform best when they react to incoming data. I think the financial markets work less efficiently when they ask the question, ‘How will the Federal Reserve react to that incoming information?'” Warsh said.

“The more that markets are paying attention to what’s happening in the real economy, deciding what’s good data and what’s less good data, the more financial markets can price what they believe is the most likely and what are the tail risks.”

No ‘dot plot’ for Warsh

Warsh was also the only member of the 19-person FOMC to not include his projections for interest rates in the Fed’s so-called dot plot. Markets analyse the dot plot to understand how the central bank might move on rates going ahead.

Among the other members, nine Fed officials anticipated raising rates at least once this year, six members wanted to raise rates twice, while another nine members expected one or no cuts.

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