Federal Reserve Chair Kevin Warsh told Congress on July 14 that the central bank's 2020 flexible average inflation targeting framework was a mistake. He promised a 'regime change' and vowed to restore the price stability mandate. Inflation has not settled below 2% in the last five years.
Why the 2020 framework failed
The 2020 framework allowed inflation to run above 2% if it had previously been below target. It also tolerated above-target inflation to support employment. Warsh told lawmakers that approach was wrong. He did not offer a specific replacement but said the Fed would return to its core mission of price stability.
Five task forces to overhaul Fed operations
Warsh set up five internal task forces to reform how the Fed works. They cover public communications, technology, the balance sheet, economic data, and inflation measurement methodology. The task forces are meant to address what Warsh called structural weaknesses in the Fed's approach. He did not give a timeline for their recommendations.
Economic backdrop: cooler inflation, new risks
June inflation data came in cooler than expected. That gives the Fed some breathing room. But economists have flagged a new risk: AI-driven inflation tied to massive data center spending. Lower recession risk estimates also give the Fed more room to hold rates steady. Warsh did not comment on the June data or the AI risk during his testimony.
Warsh returns to Capitol Hill on July 15 for testimony before the Senate Banking Committee. Lawmakers are expected to press him on the details of the regime change and the task forces. The question hanging over the hearing: how quickly can the Fed actually bring inflation down?
