June 19, 2026
Fed Chair Warsh is off to a flying start. The biggest takeaway from this week’s FOMC meeting was Warsh’s statement that “Members of the FOMC are unambiguous and unanimous: This Committee will deliver price stability.” That is a powerful statement. With that goal in mind he also announced that he will appoint a task force to examine each of five areas that are central to the conduct of monetary policy: communication, the balance sheet, the use of existing data sources, productivity, and the Fed’s inflation framework. With new leadership this is the time to examine all aspects of monetary policy and embrace changes that are deemed appropriate.
It is clear that going forward this group intends to think more and talk less. The statement released at the end of the meeting contained far less information than had been the case previously. The entire statement was 130 words versus 346 words in April. It contained a skimpy single sentence each about the economy, productivity, the labor market, and inflation. And there was no “forward guidance” which described the conditions under which the Fed might change policy.
The Fed maintained (for now) the so-called ”Dot plot” projections which note each member’s forecasts for GDP growth, the unemployment rate, the overall and core personal consumption expenditures deflator, and the federal funds rate for the next three years. The biggest change in the dot plot matrix was that given the sharp increase in the outlook for inflation, FOMC members now expect a 0.25% rate hike prior to yearend. Three months earlier they had expected a similar-sized rate cut.
With respect to the various task forces, the communications issue is critical. We are currently inundated almost daily by often-conflicting speeches from Fed governors and Reserve Bank presidents. Economists track them all to try to determine the Fed’s reaction function. But do we need that? Nineteen Fed officials will have the same similarities and differences in their forecasts as a group of 19 non-Fed economists. We do not need the Fed to describe the economic situation for us. So, what is the appropriate amount of information the Fed should provide?
Second, there has been a lot of discussion that the Fed’s balance sheet is too large. It was far too big after COVID, but it has been shrinking gradually and is now almost back to the trendline that existed prior to the recession. Is it still far too big? Or is it close to being the right size? Then there is the issue of the composition of its portfolio of U.S. Treasury and mortgage-backed securities. It has been cutting back on its holdings of mortgages but they still comprise about one-third of its asset portfolio. Should the Fed be holding mortgage securities at all?
Third, there is currently a wide range of data sources that are incorporated into the Fed’s view of the world – and its model of the U.S. economy. Given the rapidly changing nature of the economy does it need additional, different types of data to do its job better?
Fourth, AI generated gains in productivity may be raising the economy’s potential GDP growth rate. Potential growth is currently believed to be about 2.0%. But productivity growth is accelerating. As a result, we believe potential growth has climbed to about 3.0%. If potential growth is 2.0% and GDP growth is averaging 3.0%, some Fed officials could conclude that the economy is growing quickly enough that higher rates are warranted. But if potential growth has climbed 3.0% GDP growth would not be alarming.
Finally, there is the inflation issue. The Fed’s macro model badly misjudged the inflation path after COVID. It insisted that the inflation boost would be temporary. It was not. Inflation accelerated but never declined. Instead, it simply grew more slowly. That is why prices levels today are so elevated. The Fed needs to revisit its model and figure out what went wrong. But remember that every model is based on history. If the economic environment is changing quickly no model can accurately incorporate those developments.
With respect to the same topic, what inflation measure should it target? There are lots of them and they differ in coverage and size. Some measures exclude categories of spending that are regarded as volatile. For example, the CPI includes prices for a fixed basket of goods that consumers typically buy each month. But food and energy prices are notoriously volatile. For this reason the most widely followed measure of inflation is probably the core CPI which excludes those two categories. Further complicating the issue is the fact that if prices for some items rise sharply consumers can switch to a lower priced good. For example, if the price of steak rises rapidly consumers might switch to ground beef. The personal consumption expenditures deflator is a weighted measure of inflation. If consumers buy more of the lower-priced good the PCE will assign a bigger weight to ground beef and a smaller weight to steaks. Indeed, if enough consumers switch to the lower priced good the PCE will decline even if the actual prices of steak and ground beef have not changed. Which is the more appropriate measure? Right or wrong, the Fed currently targets the personal consumption expenditures deflator excluding food and energy.
But perhaps not all food prices change sharply so why exclude the entire category? “Trimmed” measures of inflation exclude those items that exhibit sizeable changes – up or down — in a given month. The Dallas Fed trimmed mean PCE inflation rate is one very popular trimmed inflation rate. But, as shown below, these various measures of inflation differ. Which is most accurate?
The Fed’s re-examination of all aspect of monetary policy is long overdue. Consumers, investors, business leaders, and policy makers should welcome those changes.
Stephen Slifer
NumberNomics
Charleston, S.C.
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