Goldman Sachs: Warsh's Five Working Groups Unlikely to Push Aggressive Rate Cuts
Alina Collins
Goldman Sachs argued on July 20 that Fed Chair Kevin Warsh's five new monetary-policy task forces carry no binding power over the FOMC — investors betting he can use an 'AI deflation' narrative to push rate cuts now are set for disappointment.
What are the five task forces actually studying?
The five groups cover: communications, the balance sheet, data collection, AI and productivity, and the inflation framework.
Goldman's core verdict after reviewing each one: the outcome will be "cosmetically significant for Warsh, marginally impactful for everyone else."
This means → the task forces are a vehicle for Warsh to signal reform, but the real rate-setting power stays with the FOMC majority vote.
Will the dot plot be scrapped?
Warsh wants to sharply reduce forward guidance and has hinted at eliminating the dot plot — the chart showing each Fed official's individual rate forecast.
Goldman sees a full removal as too large a step backward on transparency for most FOMC members. The committee debated communications reform last year and failed to reach consensus.
The likeliest compromise: adopt former Vice Chair Don Kohn's proposal to stop publishing the median projection, so markets no longer read it as an official FOMC endorsement. In plain terms = the dots stay, but the Fed stops highlighting the midpoint; investors can still calculate it themselves, so actual information loss is minimal.
Can the Fed's balance sheet shrink back?
Warsh has long criticized QE — quantitative easing, the Fed's large-scale bond buying to inject liquidity — and the Fed's outsized balance sheet. Yet he has acknowledged he is "not naïve enough to think we can return to 2006."
The task force itself is split: Stein argues a large balance sheet supports financial stability; Rajan warns of a ratchet effect — expanding is easy, but shrinking never fully reverses.
Goldman's judgment: there is almost no internal FOMC support for abandoning the ample-reserves framework. This means → the real open question is not *whether* to shrink, but which assets the Fed should hold long-term — Treasuries in proportion to issuance, or mainly short-term T-bills.
Can "AI deflation" justify rate cuts now?
Warsh argues AI will produce structural deflation on a scale that may dwarf past technological advances. Task-force member Charles Jones, a Stanford economist, concluded in a recent NBER working paper that AI will ultimately boost productivity significantly, but the full impact will take considerable time.
Goldman flags two reasons this logic cannot support near-term easing: productivity forecasts have historically been highly unreliable; and several FOMC members have stressed the near-term inflationary pressure from AI-related demand, directly contradicting Warsh's downplaying.
In plain terms = "AI will make things cheaper someday" may be right, but using an uncertain future forecast to justify cutting rates today is a trade most FOMC members will not take.
How will the inflation framework change?
Warsh and Mankiw want the inflation target read as "2%," not "2.0%" — no excessive self-criticism over minor deviations. Goldman views this as virtually uncontroversial in the current environment.
On monetary aggregates, Warsh advocates renewed attention to money-supply measures but told Congress explicitly: "I am not a monetarist." This reflects a search for middle ground — exploring whether alternative measures can improve inflation forecasting, not a return to textbook monetarism.
On supply shocks, Warsh's stance — ensuring an initial price shock "does not spread" — is expected to win broad support. But Goldman notes that judging how long a supply shock lasts remains the core challenge, and the task force cannot offer a simple answer.
Has the rate forecast changed?
Goldman leaves its fed-funds rate forecast unchanged: 3.50%–3.75% for all of 2026, gradually declining to 3.00%–3.25% by 2027.
This means → Goldman sees the task forces as an institutional conversation, not a rate signal — they will not alter the pace of easing.
In plain terms = Warsh is building frameworks and signaling reform, but the rate path is determined by data and the FOMC majority. Investors should not trade the task forces as a dovish catalyst.
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