Federal Reserve Chair Kevin Warsh stated on Wednesday at the European Central Bank's Sintra Forum that the Fed is "forging a new path," moving forward to base monetary policy decisions on a novel real-time data system, moving away from reliance on official statistical reports which suffer from lags and biases.
"My vision is that within 9 to 12 months, we will be utilizing new technologies to track the real economy in real time, allowing central bank decisions to be built upon synchronous, immediate data, thereby enabling more precise policy judgments," Warsh said. Last month, he established five specialized task forces, one of which is dedicated to finding new data sources and methodologies, with the member list to be announced next week.
On the issue of inflation, Warsh's remarks conveyed a nuanced dual tone. He clearly acknowledged that "price levels are too high" and reiterated the Fed's commitment to achieving its 2% inflation target, stating that any notion that the Fed would be content with inflation exceeding 2% would lead to "disappointment." However, he also pointed out that over the past four weeks, inflation expectations and inflation risks have somewhat declined.
Warsh also expressed new thinking regarding the methodology for assessing inflation itself. He has long favored the Dallas Fed's "trimmed mean" inflation measure, which shows an inflation rate (around 2.4%) significantly lower than the official CPI (4.2%) and PCE (4.1%). His reform implies that the Fed may incorporate a more diverse set of inflation indicators into its decision-making framework.
Furthermore, Warsh again emphasized the Federal Reserve's policy independence and reiterated that it will not provide forward guidance on interest rates, with policy decisions to be entirely dependent on data performance.
Comments