Federal Reserve Chair Kevin Warsh has begun revising the central bank’s monetary policy framework, shifting the focus away from traditional forecasts and the concept of a “neutral rate” toward broader financial conditions. In his view, policymakers should give more weight to asset prices, the dollar’s exchange rate and credit availability.
The rethink comes as inflation remains elevated. The core personal consumption expenditures price index stood at 3.7%, well above the Fed’s 2% target. Warsh said the central bank would continue working to bring inflation back to that level and would not tolerate persistently high price growth.
Against that backdrop, markets are expecting further tightening. Investors now put the probability of another rate increase at 70%. Inflation pressures are also being reinforced by a rise of more than 30% this year in the Bloomberg Commodity Index and an 83% jump in diesel fuel prices.
The Fed is also facing the separate challenge of reducing its balance sheet, which currently stands at $6.7 trillion. That effort is being complicated by elevated inflation and by US 10-year Treasury yields holding above 5%.
At the same time, the Federal Reserve has created working groups to assess the institution’s performance. The groups include Wall Street representatives, academics and former officials, among them Marc Andreessen and Greg Mankiw.
