No Rate Change, Yet Big Changes Ahead:

The Fed meeting that begins today will likely result in no policy rate change announced tomorrow; however, significant changes are coming to the Federal Reserve.

Fed Chairman Kevin Warsh has assembled five task forces of high-powered thought leaders from former central bankers, top academics, business executives, and investors to examine some of the most important aspects of how the Fed operates: Communications, Balance Sheet Policy, Data, Productivity and Jobs, and Inflation Framework.

Warsh is not looking to make incremental changes; he is challenging some of the fundamental assumptions that have shaped monetary policy since the GFC, and generations prior.

Communications: Warsh has argued that the Fed should provide less forward guidance, which allows maximum flexibility. With fewer words, the dot plot will come to an abrupt end, as this is an experiment that proved to be highly ineffective. The dot plot is the antithesis of what Warsh plans to communicate to markets.

Balance Sheet: Warsh has been a longstanding critic of QE and the Fed’s enormous balance sheet. While the task force will likely determine that wholesale reversal will be difficult, we should expect this re-examination to limit its use going forward printing money is inflationary and poor policy, other than the most extreme case.

Productivity and Jobs: Warsh has described AI as “structurally disinflationary,” and I agree with the long-term thesis. AI should drive enormous productivity gains and lower the cost of producing goods and services. This task force will prove consequential as it evaluates structural change of employment and inflation. I agree with Chair Walsh’s assessment, however in the short-term the AI buildout is inflationary for segments of the economy such as the cost of data centers, electricity generation, gas turbines, transformers, chips, memory and networking equipment; while the long-term impact should be deflationary as productivity accelerates and technology reduces costs. The challenge is that monetary policy operates in the present, while the productivity benefits of AI may take years to fully materialize.