Warsh and the star-studded task forces

 

Chairman Warsh has announced the members of his task forces for review of Fed policies. I am impressed by the choices and the seriousness with which you are trying to provide fresh perspectives on some key problems. This is not an internal review but includes both business and academic thinkers with key knowledge for each task. I am thinking this may be one of the most extensive and far-reaching reviews ever attempted by the Fed. 

Task Force	Objective / Focus Area	Members (Co-Leaders)
Communications	Reviewing how the Federal Reserve conveys policy deliberations, decisions, forward guidance, and economic projections.	* Peter R. Fisher (Professor of Practice, Foster School of Business, University of Washington)* Arminio Fraga (Founder/Chairman, Gávea Investimentos; former President, Central Bank of Brazil)* Mervyn King (Former Governor, Bank of England)
Balance Sheet Policy	Examining the costs, benefits, and institutional implications of the Fed's balance sheet regime.	* Karen Dynan (Professor of Economics, Harvard University)* Raghuram Rajan (Professor of Finance, University of Chicago Booth; former Governor, Reserve Bank of India)* Jeremy Stein (Professor of Economics, Harvard University; former Federal Reserve Governor)
Data	Improving the quality, speed, and timeliness of real economic signals to inform monetary policy decisions.	* Raj Chetty (Professor of Economics, Harvard University)* Doug McMillon (Former President and CEO, Walmart Inc.)* Kevin Murphy (Professor of Economics, University of Chicago)
Productivity and Jobs	Assessing the economic impact of general-purpose technologies, particularly artificial intelligence (AI), on labor and productivity.	* Marc Andreessen (Cofounder and General Partner, Andreessen Horowitz)* Charles I. Jones (Professor of Economics, Stanford University / Anthropic)* Asha Sharma (Executive Vice President & Xbox CEO, Microsoft Corp.)
Inflation Frameworks	Evaluating the effectiveness and design of the Federal Reserve's underlying framework for price stability and targeting inflation.	* Greg Mankiw (Professor of Economics, Harvard University; former Chair, Council of Economic Advisers)* Thomas Sargent (Professor of Economics, NYU; Nobel Laureate)* William White (Senior Fellow, C.D. Howe Institute; former Economic Adviser, BIS)

Warsh and forward guidance - NOT

 

What is clear from the first Warsh press conference is that he will not provide forward guidance on the Fed’s actions. Chairman Warsh is not going to tell the market anything about what the Fed may be doing in the immediate future.

Governor Waller, on the other hand, provided a spirited defense of forward guidance that serves a specific purpose, albeit flexible to meet policy needs. Perhaps forward guidance was useful when we were close to the zero bound, and the Fed wanted markets to know that rates would be lower for longer. It may not be appropriate today, given that we are in a different regime.

Nevertheless, forward guidance is supposed to signal policy to the makrets os they will bend to the desires of the Fed. If the Fed is unsure which direction to take, any forward guidance may be wrong-footed. 

In any case, less forward guidance should lead to more bond market volatility and more discussion on what the Fed is thinking. Fed watch is back in vogue.

Hidden Dissent and the Fed

 

The markets were in an uproar over the dissents at the last FOMC meeting, and they may be expecting further dissent at the July meeting. Yes, dissent announces and measures dissent, but there are other ways to measure dissent that may be more useful. Researchers can look at the comments of Fed governors and bank presidents to measure dissent. The use of NLP and LLMs can count words, form sentiment indices, and use context to measure differences of opinion over time. 

Two researchers have examined transcripts and minutes from Fed officials to measure what they call “hidden dissent.” Their index is available through their website, digitecon.org. Their index correlates with dispersion in SEP forecasts. Markets respond to dissent across the Fed.  

Jevons paradox and AI

Jevons’ paradox was developed in the 1800’s to explain dynamics in the coal market. Jevons found that technological improvements can increase resource efficiency, but that will often lead to an increase in total resource consumption. The increase in efficiency leads to lower effective cost, and with costs lower, demand will increase. 

We see this effect across many industries undergoing technological improvements, but it may be best exemplified by the AI market, where efficiency keeps improving while demand still grows. The electricity demand will increase. The demand for chips will increase. The demand for data will increase. Yes, there is efficiency, yet consumption of the core product and associated supplies will also increase. 

There is nothing special about the AI industry. It is following the same behavior we have seen countless times over centuries.