You can observe a lot just by watching: Digging into the Chair’s task forces for advancing monetary policy

Research evidence excerpt

You can observe a lot just by watching: Digging into the Chair’s task forces for advancing monetary policy

dents in policy messaging. Moreover, it’s not

clear what would replace the dot plot if it's eliminated. If there were an obvious choice,

presumably last year’s extensive review of communications would have recommended

that. And without a replacement, eliminating the dot plot would be a step backward in

transparency.

Finally, one thing the chair could do without the acquiescence of the FOMC is shorten

the press conferences or make them less frequent. While this is an option that would

align with some of Warsh’s stated preferences, it would also be ceding more of the

monetary policy narrative to other members of the committee, thereby diminishing his

own importance.

Over time, we have found that implied volatility is a significant factor in our term

premium models, and have argued that volatility has declined over the last 30 years,

adjusted for the level of rates, in part aided by more transparent insight into the Fed’s

reaction function. By association, this also contributed to lower term premium over the

last 15-20 years (see Don't let it bring you down, Jay Barry et al. 1/5/18). Accordingly,

volatility and term premium could rise should the use of forward guidance be

further limited, but we think this would only be meaningful should the task force

make the choice to reduce communications about the Fed’s reaction function.

Balance Sheet Policy

Warsh worries not about fiscal dominance, but rather monetary dominance, where the

central bank becomes the ultimate arbiter of fiscal policy. The Chair also believes that

the growth of the Fed’s balance sheet has depressed term premium, inflated risk asset

valuations, and skewed wealth distribution toward asset holders.