Today we'll talk about Kevin Warsh, the new chair of the Federal Reserve, and the presentation that he gave to the press last week.
A lot of the issues that he dealt with, are really quite different than the sort of things previous chairs have talked about to the media.
Kevin Warsh was talking about perhaps the most dramatic reorganisation of the Federal Reserve and its functions that has been undertaken in the last 30 years. His way of bringing about these changes is not to set out an agenda and impose it from the top, but to harness the capacity of the team at the Federal Reserve to look at various areas where change needs to be made and generate that change from the bottom. There will be consensus that those changes will be a good thing when the process is completed. That should be a successful way of bringing about major change in such an important institution.
In his speech, Kevin Warsh has a number of verbal habits which are unusual for previous chairs of the Federal Reserve. He started by talking about the legislative remit of the Federal Reserve. “Remit” is a word I’ve not heard used before by other central banks heads apart from Mark Carney, when he was governor of the Bank of England and who is now Prime Minister of Canada.
Warsh also talked about the “price level” rather than talking about inflation or the rate of increase in prices. That is a normal usage for somebody who’s been in currency markets, gold markets, and commodities markets for a long period of time.
One of the comments he made later in the presentation was that the bond market knows more than the Federal Reserve does. I think one of the things he is trying to do is generate the same kind of up-to-date and rapidly available information that is used in financial markets, rather than waiting for other government entities to publish reports, which is how the Fed has worked in the past. To do this, he instituted five task forces.
The first task force is on Communication, including things like press conferences.
The next is on balance sheet policy. I’ve talked before about Kevin Warsh preferring to run down the balance sheet rather than hike rates, and we’ll come back to that.
The third is a data task force, focused on new information sources to bring the Fed to the same level of information as the bond market.
The fourth is productivity, which is really about how jobs are changing rather than productivity itself.
The fifth is on inflation frameworks and the ways in which the Fed might specify and deal with inflation.
Looking at these points in more detail, Kevin Warsh talked about the Feds legislative remit and said it was for price stability and maximum employment, which states the Fed’s objectives in a different way than most other central bankers, who would normally talk about targeting inflation and full employment. Even in setting objectives, he is changing the framing in interesting ways. He talked about the importance of maintaining ample reserves in the banking system and said very strongly that this committee will deliver price stability. He also said that statements released to the press will be shorter and simpler, just giving the facts as best they can judge them, and that forward guidance will be absent from these statements. He said the committee agreed that forward guidance was no longer suited to the current policy setting.
He said that the outlook for the US economy in the Summary of Economic Projections was 2.2% growth this year and 2.3% next year, so with no recession in sight, and PCE inflation declining from 3.6% this year to 2.6% next year. The projections also suggested rates would be 3.8% at the end of this year and 3.6% next year. That effectively means an average expected increase of only 0.2, which is less than one rate hike. It is interesting that Kevin Warsh himself did not vote in the Summary of Economic Projections this time, and had he done so, the net change of forecast for the end of the year would have been zero, implying no hike at all. It is interesting how the market has suggested he is a hawkish Fed chair, which does not seem to be his own view.
When discussing the task forces in detail, including Communications, the Fed balance sheet, Data sources, Productivity and jobs, and the Inflation framework, he said that all task forces would operate in the same way.
They would start with first principles, ask hard questions, examine current practice, then consider alternatives and propose next steps for policymaker consideration. He noted that the Communications Task Force had already been operating since the middle of last year and had discussed things like the Summary of Economic Projections and how communication should function in the future.
He then discussed the committee on the composition of the Federal Reserve balance sheet, which would examine alternative frameworks for managing it. The data task force aims to achieve more accurate, relevant and contemporaneous information, because much of the data the Fed currently receives from other government agencies reflects conditions from months earlier rather than the current state of the economy.
Another task force focuses on productivity and jobs, particularly how jobs are changing across the economy.
The fifth task force covers the drivers of inflation.
The objective of all these changes is to create a Federal Reserve that is clear-eyed, fit for purpose, and focused on the future.
My own view of the outlook for rates, since both the RBA and the Fed have met in recent days, is that the Fed has only about a 50% chance of any rate hike this year, which means it is unlikely. However, for the cash rate, we think there will definitely be a rise at the next meeting and that it is highly probable there will be a further increase at the meeting in November.
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DISCLAIMER: Information is of a general nature only. Before making any financial decisions, you should consult with an experienced professional to obtain advice specific to your circumstances.
