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• Eye on Fed policy amid change

  FOUR POTENTIAL SHIFTS: One possible change to Fed policy stems from the new chairman’s criticism of its ‘dot plot’ system, which provides interest rate projections

  • By Crystal Hsu / Staff reporter
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  A change in leadership at the US Federal Reserve could usher in significant shifts in monetary policy and communication strategy, underscoring mounting market scrutiny over how new Fed Chairman Kevin Warsh might redefine the role of the world’s most influential central bank, Taiwan’s central bank said on Facebook on Thursday.

  Taiwan’s central bank outlined four key policy changes that could emerge under Warsh, who succeeded Jerome Powell after Powell’s term as Fed chair expired yesterday.

  The leadership transition could reshape the Fed’s approach to policy communication, inflation assessment, balance-sheet management and the scope of the institution’s mandate, the post said.

  

  Central bank Governor Yang Chin-long speaks at a news conference in Taipei on Dec. 18 last year.

  Photo: CNA

  The US Senate confirmed Warsh in a narrow 54-45 vote, highlighting deep divisions in Washington over the direction of monetary policy.

  Powell has indicated he would remain on the Fed’s Board of Governors after stepping down as chairman — the first such arrangement in nearly eight decades — potentially complicating the internal balance of influence at the Fed and raising questions over policy continuity.

  Warsh’s views on monetary tools and governance could carry broad implications for global financial markets, warranting close attention from policymakers and investors worldwide, Taiwan’s central bank said.

  Among the most closely watched changes is Warsh’s criticism of the Fed’s “dot plot” system, introduced in 2012 to provide policymakers’ projections for interest rates.

  Warsh has argued that heavy reliance on forward guidance can constrain policy flexibility and amplify market volatility, advocating the elimination of the dot plot and even a review of the Fed’s routine post-meeting news conferences.

  Warsh has also questioned the Fed’s use of the core personal consumption expenditures (PCE) index, its preferred inflation gauge that excludes food and energy prices.

  While core PCE remains a key benchmark for policymakers, Warsh has said it can be distorted by short-term price swings.

  He has instead expressed support for alternative measures such as trimmed-mean or median inflation indicators, which he believes better reflect underlying price trends and could provide a more stable basis for policy decisions.

  On policy tools, Warsh has called for shrinking the Fed’s balance sheet, and reducing reliance on quantitative easing and other large-scale asset purchases.

  He has said that the Fed’s vast holdings of long-term US Treasury bonds amount to a form of quasi-fiscal policy that risks inflating asset prices and widening wealth inequality.

  By contrast, Warsh has said interest rates remain a broader and more effective tool for steering economic activity without distorting financial markets.

  Warsh has also said that the Fed should refocus on its core mandates of maintaining price stability and supporting maximum employment.

  While acknowledging the need for coordination with the White House and the US Congress, he has said that the Fed should avoid expanding too deeply into nonmonetary issues such as climate policy and should preserve what he described as “independence within government.”

  The commentary from Taiwan’s central bank came as global investors reassess the potential trajectory of US monetary policy, and its potential spillover effects on global capital flows, currencies and asset markets.
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