The Federal Reserve's policy framework reform, championed by Chair Christopher Waller, has entered a substantive phase. The leadership for five major working groups was officially unveiled on July 9th. This internal restructuring, viewed by many as an effort to build consensus, is advancing along a clear three-step roadmap, with its ultimate destination potentially being the resumption of rate cut discussions in the fourth quarter.
The Fed's overnight announcement of the leadership roster brought together heavyweight figures including former Bank of England Governor Mervyn King, former Reserve Bank of India Governor Raghuram Rajan, prominent Silicon Valley investor Marc Andreessen, Harvard economics professor Greg Mankiw, and Nobel laureate Thomas Sargent, covering global central banking, top academia, and the tech industry. The five groups will separately assess monetary policy communication, the balance sheet, economic data, productivity and employment, and the inflation framework, submitting research reports by year-end.
Prior to this, adjustments to the PCE statistical methodology announced by the Bureau of Economic Analysis had already prompted warnings from institutions like Goldman Sachs and UBS, noting the changes would systematically lower core PCE inflation readings. China Securities, in a report released before the working group list, linked these developments into a coherent policy narrative: personnel arrangement, framework reshaping, and a dovish pivot, a three-step process aimed squarely at rate cuts. The formal establishment of the working groups appears to confirm this analysis.
Working Groups Span Central Banking, Academia, and Silicon Valley
According to the Fed's July 9th announcement, each of the five working groups will be co-led by three experts from different fields, supported by Fed staff.
The Monetary Policy Communications Working Group will be led by Mervyn King, University of Washington Foster School of Business professor and former senior U.S. Treasury official Peter Fisher, and former Central Bank of Brazil Governor and Gávea Investimentos founder Arminio Fraga. It will focus on evaluating how the Fed can improve its communication in uncertain environments.
The Balance Sheet Working Group, led by Harvard economics professor Karen Dynan, Raghuram Rajan, and Harvard economics professor and former Fed Governor Jeremy Stein, will systematically assess the costs and benefits of quantitative easing, quantitative tightening, and the long-term reserve system.
The Economic Data Working Group, comprising Harvard professor Raj Chetty, former Wal-Mart CEO Doug McMillon, and University of Chicago economics professor Kevin Murphy, will research improving the quality, timeliness, and availability of economic indicators.
The Productivity and Employment Working Group is the most tech-oriented arrangement in this reform, led by Andreessen Horowitz co-founder Marc Andreessen, Stanford economics professor Charles Jones, and Microsoft Executive Vice President Asha Sharma. It will focus on assessing the impact of general-purpose technologies like AI on productivity, labor markets, and long-term growth potential.
The Inflation Framework Working Group, consisting of Greg Mankiw, Thomas Sargent, and former Bank for International Settlements economic adviser William White, will re-examine the Fed's framework for analyzing inflation drivers and formulating policy responses.
Waller stated in a release that each group will carefully evaluate whether the methods, analytical tools, and policy paths used by decision-makers can be further improved, with the "very explicit goal" of ensuring the Fed is in its best position to fulfill its duties during this critical period.
PCE Methodology Shift May Lower Inflation Readings
Before the working group list was announced, another clue had quietly emerged.
The BEA announced methodological adjustments to three components of the PCE price index, to take effect on September 30, 2026, with historical data to be revised. According to reports, Goldman Sachs and UBS released research suggesting these changes would systematically lower core PCE inflation readings.
The most impactful of the three adjustments is for the portfolio management services component. The current method directly deflates nominal spending using the industry's PPI. As rising asset prices have pushed up management fees, this component contributed a 21.6% year-over-year increase over the last 12 months, making it the second-largest contributor to core PCE inflation. The new method will instead use total hours worked growth from employment surveys to measure "real service volume." Since hours growth is far slower than asset growth, the calculated price increase will drop significantly. UBS economists, including Alan Detmeister, estimate this change would reduce year-over-year core PCE inflation by about 0.21 percentage points.
Regarding the computer software and accessories component, Goldman Sachs analysts, including Manuel Abecasis, estimate the new method would have lowered year-over-year core PCE inflation by 0.05 to 0.1 percentage points in May and by 0.1 to 0.2 percentage points in December. The adjustment to the legal services component would have slightly increased inflation by about 0.04 percentage points in May, partially offsetting the downward effects of the first two.
Combining the three changes, both Goldman and UBS see the net effect as a systematic downward shift in core PCE inflation readings. UBS went further, stating the choice of changes "looks like it was chosen to lower inflation," and warned the new method lacks transparency, making independent verification difficult and raising risks of data manipulation.
Three-Step Roadmap Points Toward Rate Cuts
A report by China Securities researcher Qian Wei, released before the working group list, interpreted these series of developments within a complete policy framework.
The report posits that upon taking office, Waller faced multiple challenges including a lack of deep internal roots, questions about independence, and divergent views. His core task is to build a consensus within the Fed, planned in three steps.
The first step (July) is personnel arrangement. By appointing working group leaders, he can balance the influence of the committee, grant the groups core policy status, and subsequently have them shoulder some of the task of guiding market expectations.
The second step (third quarter) is framework adjustment. Traditional employment and inflation indicators are volatile in the short term and make consensus difficult. The AI revolution provides Waller an opportunity to introduce a new supply-side framework. The core logic is that rising productivity can control inflation, thereby creating space for monetary easing. Citing the 1995-1998 case, the report notes that despite strong wage growth and a robust economy then, trend productivity growth was rising and inflation was falling. The link between wages and prices was broken by productivity gains, and the Fed ultimately chose to cut rates.
The third step (fourth quarter) is a policy pivot. With the groundwork laid by the first two steps, the Fed turns dovish, restarting rate cut expectations. The report points out that current conditions—productivity growth climbing, wage growth decelerating, tech sector layoffs, and a less tight labor market—are "essentially a mirror image of 1999." If employment and CPI data cooperate moderately, the working groups' final conclusions will likely help the Fed pivot dovishly, with rate hike expectations receding.
From a timeline perspective, the establishment of the working groups seems to validate the internal logic of this narrative—personnel arrangements are complete, while framework adjustments and the reinterpretation of inflation data are progressing simultaneously.
The Inflation Framework Working Group will re-examine the Fed's methodology for analyzing inflation, the Economic Data Working Group will study how to improve indicator quality, and the Productivity and Employment Working Group will provide academic support for the new supply-side framework. Together, they form a complete loop paving the way for rate cuts.
Waller stated that the U.S. economy has "changed dramatically over the past generation, and the pace of change today is unprecedented," necessitating a fresh look at the Fed's policy tools and analytical methods. Each working group will submit its research report by year-end, at which point the contours of the policy framework adjustment will become clearer.
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