In our view, the most important part of Fed Chair Warsh’s opening press conference last week was not the dropping of forward guidance—that was already dead and buried in light of the inflation regime shift since 2020—rather, it was the lack of clarity regarding the Fed’s new reaction function to employment and inflation. In our opinion, this creates the most uncertainty: if the Phillips curve–type view of the world is being jettisoned, what replaces it? The new Fed chair wants to conduct a root-and-branch review of the Fed and its operations, leaning on five taskforces established to review 1) its communications strategy, 2) the size of its balance sheet, 3) the data used to make policy decisions, 4) productivity and the potential impact from the emergence of AI, and 5) what drives inflation from a first principles approach and how to deliver on price stability.
In this Economics Weekly, we contrast the philosophical approaches taken by more recent Fed chairs with the approach that Chair Warsh seems to be proposing.