Warsh at Sintra: Cautious Optimism on AI and Task Force News Coming Soon
- Chair Warsh echoed his comments from the June press conference. On multiple occasions, Warsh made sure to reiterate his pledge that the Fed is committed to price stability. The dovish side of the coin came from his quite optimistic read on the recent productivity data as well as the potential from the AI boom.
- Warsh gave a bit more color on the timing and makeup of the task forces; we’ll learn about their makeup “likely next week.” Bloomberg reported afterwards that former BoE Governor Mervyn King will co-chair the task force on communications policies. again signaled a desire to get rid of the dot plot in due course.
- Broader takeaways across the panel focused on how the differing initial conditions going into the war shock have been key in shaping central banks’ responses and a skepticism of the wisdom of forward guidance around policy outcomes, as distinct from communicating an understanding of the current economy, risks, and reaction functions, outside of the dislocated zero lower-bound conditions which originally gave rise to forward guidance after the GFC.
- The discussion of the AI boom was optimistic in tone, although the inflation contingency of that optimism was clear enough.
Lagarde began the panel by offering a simple defense of the ECB’s recent rate hike. “When you have your inflation outlook up, core inflation up, underlying inflation indicating it also trending up, and that you’re only going back to your 2% target at the end of ‘28… you have the obvious decision” to hike rates, particularly when the real side of the economy seems relatively balanced. Warsh’s most immediately relevant dovish comments of the day was that over the past 4 weeks “expectations of inflations have come down. Risks have come down.”
Bailey noted that the macroeconomic context in the UK is appreciably different than in the US and EZ given the output gap they had going into the war’s supply shock and the subsequent increase in that slack since. In addition, he was firm in his belief that the UK was trending towards 2% target before the war and everything he’s seen since “has confirmed me in that view.” Rate cuts were expected and by taking them off the table, with the UK’s benchmark mortgage rate up 1p.p., “you can argue that we’ve actually tightened policy since the conflict broke out.” Macklem struck a similar tack, noting that “we’re all facing pretty similar shocks, but we all start from pretty different places, and we have different proximities to these shocks.” The starting conditions on the real side of the economy heightening the tradeoffs for monetary policy in the face of a supply shock. For the US, this is a key part of the FOMC recent move away from easing biases; the cumulative impact of the inflation overshoot is worse and the economy seems close enough to, an admittedly bit odd, equilibrium.
Warsh is leading the charge in terms of the aggressiveness of his pushback, but the broader attitude towards forward guidance has clearly shifted. Lagarde’s view is that they try to offer clarity around their process through “framework guidance,” focusing on their understanding of the current data, key risks, and their reaction function, pivoting away from forward guidance directly about the path of rates. Warsh noted that “we have found common cause” on the subject. The Fed Chair seems eventual less prone to communicating about those 3 pillars than the others but seemed a bit more open today in his comments than he was after the FOMC. His basic view, which will likely drive the Fed away from the dot plot in time, is that he sees forward guidance and attempts to suppress volatility in markets as “the right policy for a crisis, it is not the right policy for the time that we are in now.”
We are starting to gain additional clarity around Warsh’s task forces, with more to come “likely next week.” Warsh said that they will be made up of a range of outside experts including former policy makers, academics, and practitioners. These will include a number from overseas, with Warsh quipping that we’re “not asking for de Tocqueville to come to America but sometimes you need” an outside voice to help bring a bit more clarity and new perspective to an issue. After the panel, Bloomberg news reported that former Governor of the BoE Mervyn King will co-chair the task force on communications policy.
The alternative data task force holds some promise but the Fed will remain cautious in how it assesses the economy in real-time and already has tremendous informational access. Warsh’s “aspiration is that 9-12 months from now we are going to be using new technologies to be understand what’s happening in real-time.” Of course, real-time data is often noisy and conflicting (the number of debate I’ve had over the past few years about a given consumer spending tracker or other); simply adding slightly more quickly provided data (such as the bank/card spending data that many pour over already, or structured approaches to analyzing corporate commentary which often is reported on quite a lag for earnings season) are unlikely to conclusive change the basic structural issues in macroeconomic forecasting and policy analysis. Alt data often has quite short histories as well and knowledge of how something performs during normal times is much less helpful than how it behaves around cyclical turning points. Helpful, probably, not a panacea on its own. It is also important to remember that other officials on the FOMC are unlikely to really see the basic inputs to their policy reaction functions change drastically given the breadth of information and analysis available to them; judgement under uncertainty is the essential challenge with data availability only rarely rearing its head and more often in financial stability and regulatory issues than macroeconomic ones.
The discussion around AI was one of general optimism all things considered. While Bailey noted that they “don’t see [the impacts of AI] in the overall economy-wide data, but that doesn’t surprise me” at this point in the early adoption and experimentation phase; that seems much more true for productivity than it does inflation though. Warsh is clearly an optimistic about the potential supply-side benefits over the medium-term and longer-term, noting that if the supply side impacts do show up “that has huge implications for monetary policy.” On the AI boom, added a few more demand side centric assessments which seem at least a bit less dovish near-term given current inflation picture and sequencing between demand growth and supply’s impact. It is worth highlighting too that Warsh seems to place little weight on labor displacement fears as a cause for dovish, rather than potentially disinflationary productivity growth, quipping that it’s “called the lump of labor fallacy for a reason.” This cautious optimism also applied his characterization of the recent productivity data as in the “high 2s;” over the medium-term “nothing is in the bank but if the last 4q are any indication… there’s reason to be optimistic.” But he still implicitly couched this as inflation contingent framing because whether or not that “optimism convey(s) into policy over the next 6-9 months, still too soon to say.”
