Five major working groups have arrived—Walsh's "united front," intended to cut interest rates?

The policy framework reform championed by Federal Reserve Chair Warsh has entered a substantive phase. With the leadership teams of the five working groups officially unveiled on July 9, this internal reshuffle—viewed by outsiders as a “united front”—is moving forward along a clear three-step roadmap, with the end goal perhaps being the restart of rate-cut trading in the fourth quarter.

The Federal Reserve’s overnight announcement of the leadership lineup brings together heavyweight figures including former Bank of England Governor Mervyn King, former Reserve Bank of India Governor Raghuram Rajan, Silicon Valley investor Marc Andreessen, Harvard economics professor Greg Mankiw, and Nobel Prize–winning economist Thomas Sargent, covering central banks worldwide, top academia, and the technology sector. The five working groups will each assess monetary policy communication, the balance sheet, economic data, productivity and employment, and the inflation framework, and will submit research reports by the end of the year.

Earlier, the PCE statistical methodology adjustment announced by the Bureau of Economic Analysis (BEA) prompted warnings from institutions such as Goldman Sachs and UBS: the related changes will systematically lower readings of core PCE inflation. Before the working group roster was released, CITIC Securities published a research report that connected the above developments into a complete policy narrative: personnel arrangements, reshaping of the framework, a shift toward dovishness—three steps aimed directly at rate cuts. The formal rollout of the working groups appears to be validating this judgment.

Five working groups unveiled; lineup spans central banks, academia, and Silicon Valley

According to the Fed’s July 9 announcement, each of the five working groups is co-led by three experts from different fields and supported by Fed staff.

• The Monetary Policy Communication Working Group is co-led by Mervyn King, Peter Fisher, professor at the University of Washington Foster School of Business and a former senior U.S. Treasury official, and Arminio Fraga, former governor of the Central Bank of Brazil and founder of Gávea Investimentos. It will focus on assessing how the Fed can improve its policy communication approach in an uncertain environment.
• The Balance Sheet Working Group is led by Harvard economics professor Karen Dynan, Raghuram Rajan, and Harvard economics professor and former Fed governor Jeremy Stein. It will conduct a systematic assessment of the costs and benefits of quantitative easing, quantitative tightening, and the long-term reserves framework.
• The Economic Data Working Group is composed of Harvard economics professor Raj Chetty, former Walmart CEO Doug McMillon, and University of Chicago economics professor Kevin Murphy. It will study ways to improve the quality, timeliness, and availability of economic indicators.
• The Productivity and Employment Working Group is the most technology-forward arrangement in this reform. It is led by Marc Andreessen, co-founder of Andreessen Horowitz; Charles Jones, professor of economics at Stanford University; and Asha Sharma, executive vice president at Microsoft. It will focus on the impact of general-purpose technologies such as AI on productivity, labor markets, and long-term growth potential.
• The Inflation Framework Working Group is composed of Greg Mankiw, Thomas Sargent, and William White, a former economic adviser at the Bank for International Settlements. It will re-examine the framework used by the Fed to analyze inflation drivers and formulate policy response.

Warsh said in the statement that each working group will carefully assess whether the methods, analytical tools, and policy pathways used by decision-makers can be further improved. “The goal is very clear—ensuring that, during this critical period, the Fed can carry out its duties in the best possible way.”

PCE statistical methodology quietly adjusted; Goldman Sachs and UBS warn that inflation readings will be lowered

Before the working group roster was released, another clue had already surfaced quietly.

BEA announced methodological adjustments to three components of the PCE price index. The changes will formally take effect on September 30, 2026, and will be applied retroactively to historical data. According to reports from the trading desk, Goldman Sachs and UBS published research reports concluding that these changes will systematically lower core PCE inflation readings.

Among the three adjustments, the most significant impact comes from the portfolio management services component. Under the current method, nominal spending is directly deflated using that industry’s PPI. Because rising asset prices have pushed up management fees, the component’s year-over-year increase over the past 12 months has reached as high as 21.6%, making it the second-largest contributor to core PCE inflation. The new method instead uses growth in total hours worked from employment surveys to measure “real services volume.” Since hours-worked growth is far slower than growth in the scale of assets, the calculated price increase will drop substantially. UBS economist Alan Detmeister and others estimate that this change will reduce core PCE year-over-year inflation by about 0.21 percentage points.

For the computer software and accessories component, Goldman Sachs analysts such as Manuel Abecasis estimate that the new method will reduce core PCE year-over-year 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 will cause inflation to rise slightly by about 0.04 percentage points in May, partially offsetting the downward effects from the first two components.

Taken together across the three changes, both Goldman Sachs and UBS believe the net effect is a systematic downward shift in core PCE inflation readings. UBS more directly points out that the selection of changes “appears designed to lower inflation,” and it warns that the lack of transparency in the new method makes it difficult for outsiders to verify independently, creating a risk of data manipulation.

CITIC Securities: a three-step roadmap; the endpoint is rate cuts

Before the working group roster was unveiled, CITIC Securities researcher Qian Wei published a research report that incorporated these developments into a complete policy framework for interpretation.

The report argues that after Warsh took office, he faced multiple challenges, including a lack of deep roots within the Fed, doubts about independence, and differences in stance. His core task is to complete the Fed’s “united front,” planned to be carried out in three steps.

• First step (July): Personnel arrangements. By using working group personnel appointments to balance the committee, the working groups are granted core policy status, and later they will take on some of the work of guiding market expectations.
• Second step (Q3): Framework adjustment. Traditional employment and inflation indicators fluctuate greatly in the short term and make it hard to reach consensus. The AI revolution provides Warsh with an opportunity to introduce a new supply-side framework. The core logic of the new framework is that upward productivity can control inflation, thereby creating room for monetary easing. CITIC Securities cites cases from 1995 to 1998 to show that, at that time, even though wage growth was high and the economy strong, the trend of labor productivity growth was upward and inflation fell; the linkage between wages and prices was broken by productivity improvements, and the Fed ultimately chose to cut rates.
• Third step (Q4): Stance conversion. With the groundwork laid by the first two steps, the Fed turns more dovish and rate-cut trading restarts. CITIC Securities notes that currently labor productivity growth is climbing, wage growth is slowing, technology-sector layoffs are taking place, and the job market is not tight—“basically a mirror image of 1999.” If employment and CPI data coordinate moderately, the final conclusions of the working groups will likely help the Fed shift dovish, and rate-hike trading will fade.

From the perspective of the timeline, the establishment of the working groups appears to confirm the internal logic of this narrative: the personnel arrangements are already in place, while the framework adjustment and the re-interpretation of inflation data are advancing in parallel.

The Inflation Framework Working Group will re-examine the methodology the Fed uses to analyze inflation; the Economic Data Working Group will study how to improve the quality of indicators; and the Productivity and Employment Working Group will provide academic support for the supply-side framework. Together, the three form a complete closed loop paving the way for rate cuts.

Warsh said that the U.S. economy “has undergone tremendous changes over the course of the past generation, and the speed of change today is unprecedented,” and that the Fed therefore needs to re-examine its policy tools and analytical methods. The working groups will submit research reports by the end of the year, at which point the outline of the policy framework adjustment will become clearer.

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