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Fed Rethinks Data
Federal Reserve Chair Kevin Warsh this week promised a new approach to monetary policy. “For too long, American households and businesses have suffered the undue hardship of high inflation,” he told the House Financial Services Committee. “This Fed will deliver price stability. This Fed has the power to do it. We have the tools to do it.”
Those tools include data and modeling about the economy, which the Fed relies on in making policy decisions. And what data and how it’s used is something he is open to changing. Warsh had earlier announced the formation of five task forces focused on enhancing the Fed’s handle on monetary policy, including the data it uses and the Fed’s frameworks to tackle inflation.
As the economy evolves, the measurements used to understand it should adapt accordingly. The metrics used by the federal government have been around for decades. The consumer price index, for example, is more than a century old and has undergone revisions over that time. In the 1930s, for example, Labor Secretary Frances Perkins overhauled the CPI to consider innovations like household electricity. The improved data helped the U.S. mobilize for World War II, according to the Bureau of Labor Statistics.
Warsh said at a June 17 press conference that the Fed could incorporate other data sources outside the federal government, and he wants to avoid “echoes of history” that prevent real-time decisions. “I’m really open minded that there [are] a lot of new data sources that we can learn from [in] the private sector, from reforms in the official sector and new analytic techniques,” he said.
CPI data has come closer to the 2% inflation target lately, rising 2.6% over the 12 months ending in June, compared to 2.9% in May. The personal consumption expenditures (PCE) index, the Fed’s preferred metric, was higher than the CPI as of May, at 4.1%. As part of its examination of the U.S. economy, the Fed also considers unemployment, which tracked at 4.2% in June, and gross domestic product, which grew 2.1% in the first quarter.
“I'm not going to say mission accomplished,” Warsh told Congress on Tuesday. “What I would say is that there’s plenty of work to do, and I would feel more confident if you had better data to inform our decision-making.”
• Emily McCormick, vice president of editorial & research for Bank Director
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