Warsh launches major Fed reform: people from multiple fields join five task forces

Author: Xiao Yanyan, Jinshi Data

Federal Reserve Chairman Kevin Warsh has appointed over a dozen outside advisors to lead five special task forces that will reexamine the central bank's core operating methods. These advisors are mainly drawn from academia, former central bank officials, and corporate executives.

Those appointed include Greg Mankiw, former senior economic advisor under George W. Bush; Nobel Prize-winning economist Thomas Sargent; and former Walmart CEO Doug McMillon. The list also includes some unconventional picks, such as conservative venture capitalist Marc Andreessen, who will join two other prominent figures from the tech world on a task force focused on employment.

These task forces were first announced by Warsh at a press conference last month, and represent the vanguard of his promise to comprehensively reform the Federal Reserve. Warsh has said that his priorities include: reducing the scale of Fed intervention in financial markets, downplaying forward guidance on the policy path, and reassessing the statistical methods the Fed uses to interpret economic conditions.

The five task forces will focus on the following areas: productivity, public communication, the central bank's asset portfolio, drivers of inflation, and the quality of economic data used to guide policy decisions. Each task force is co-led by three outside advisors.

In a statement, Warsh said these task forces "will take a hard look at whether there are improvements to be made in policymakers' existing tools, analytical methods, and policy frameworks."

These task forces carry Warsh's ambitious bet — he is trying to persuade the Fed to gradually unwind the large-scale unconventional operating practices that have developed since the 2008 financial crisis. However, the task forces' role is limited to providing advisory recommendations. They will submit their findings to the Federal Open Market Committee, which sets interest rates, and the committee is under no obligation to act on them. Previous Fed chairs have also tasked committee members with proposing reforms to communication strategies, but those efforts have often resulted in only marginal adjustments.

To what extent these task forces can truly reshape the institutional fabric of the Fed, rather than merely generating a set of well-argued reports that gather dust, will depend on whether Warsh can win over Fed Board members, regional bank presidents, and career staff — some of whom helped build the very practices Warsh hopes to phase out and continue to defend them.

Below is a breakdown of the five task forces.

Artificial Intelligence, Productivity, and Employment

Among the five task forces, the Employment and Labor group is the only one to include figures from outside the traditional expert class of Washington policy circles. It is co-led by Marc Andreessen — an open supporter of the second Trump administration — along with Stanford professor Chad Jones and Asha Sharma, who oversees Microsoft's Xbox gaming business. Professor Jones has previously collaborated with AI giant Anthropic.

Warsh served as a Fed governor from 2006 to 2011, and over the following decade-plus, he built close ties with Silicon Valley as a fellow at Stanford's Hoover Institution. While considering the Fed chairmanship last year, he laid out an optimistic vision of how AI would reshape the economy, predicting that AI would help individuals and businesses boost productivity. Warsh used this view to argue for keeping interest rates low, on the grounds that a more productive economy can grow at a high rate without fueling inflation.

Public Communication

Warsh has made communication a key focus of his reform agenda. The Public Communication task force will be co-led by Peter Fisher, a former Treasury and New York Fed official; Arminio Fraga, former governor of Brazil's central bank; and Mervyn King, who ran the Bank of England for a decade.

For a chair skeptical of pre-releasing policy signals, Mervyn King is a natural fit — but only to a point. In a 2022 paper, King argued that forward guidance — signaling the direction of interest rates to markets — had become a burden. He suggested that central banks should not pre-draw the expected path of rates, but instead explain how they will respond to changes in economic conditions. He wrote: "Central bank communication needs to focus on... developing a narrative about the state of the economy, which evolves with each meeting and each report."

Warsh's skepticism is more thoroughgoing. He is even wary of the more restrained approach — outlining how the Fed will react to changing conditions. In his view, even if the central bank tries to describe its own decision-making process, it still counts as a variant of the forward guidance he wants to abandon.

Balance Sheet

Harvard's Karen Dynan, former Fed governor Jeremy Stein, and former Reserve Bank of India governor Raghuram Rajan will study how the Fed should manage its trillions of dollars in bond holdings. Warsh has long criticized the practice of buying assets to stimulate economic activity when interest rates are near zero — known as quantitative easing.

Rajan has emphasized the asymmetry of quantitative easing, noting that shrinking the balance sheet is far more difficult than expanding it. In a co-authored paper presented at the 2022 Kansas City Fed's Jackson Hole symposium, he argued that the process is not simply the reverse of expansion and cannot be executed smoothly. The result is a one-way ratchet effect: during periods when the Fed massively injects liquidity into the financial system, the lending habits formed by banks do not naturally fade when policy shifts, leaving the financial system — especially smaller, less resilient banks — somewhat dependent on that cash, and dangerous once it is withdrawn.

Inflation

Mankiw, Sargent, and William White, a former advisor to the Bank for International Settlements, will reexamine how the Fed understands and responds to inflation. The Fed implemented a major overhaul of its policy framework in 2020, adopting a strategy aimed at solving the opposite problem — inflation running persistently below the 2% target for nearly a decade. At the time, the Fed agreed to accept inflation running moderately above 2% for a period to make up for previous shortfalls.

However, that framework was abandoned almost immediately after its introduction. The reason was that during the post-pandemic economic recovery in 2021, U.S. inflation surged to its highest level in 40 years. The Fed formally scrapped the framework last year. Warsh wants to tailor a new inflation response framework for the current economic environment, but he has so far said little about what the specific alternative would entail.

Economic Data

The Economic Data task force, led by former Walmart executive McMillon, along with economists Raj Chetty and Kevin Murphy, will review whether the Fed's initial methods for calibrating economic activity suffer from bias.

Warsh believes that policymakers rely too heavily on large government statistical surveys, whose response rates have been declining and which are based on economic structures from decades ago. In his view, private companies can obtain more reliable information. At a conference last week outlining his reform vision, Warsh said, "If we do our job right and look back a year from now, we will say that we have found data that helps us make better decisions."