Goldman Sachs Analyzes the Fed's "Five Task Forces": If Waller Wants to Use This to "Cut Rates," It's Hard to Get Support

Goldman Sachs believes that Walsh is attempting to push through radical changes with his working groups, such as reducing forward guidance, drastically shrinking the balance sheet, and loosening policy based on the theory of AI-driven deflation. However, these proposals conflict with the institutional inertia of the FOMC and are unlikely to win majority support. The Federal Reserve's policy is unlikely to undergo a radical shift and will most likely reach a compromise solution that “superficially satisfies Walsh, but with limited substantial impact.”

Goldman Sachs believes that the recommendations of the Fed's “five major working groups” are not binding on the FOMC, and Fed Chair Kevin Warsh’s radical positions in several areas—including reducing forward guidance, shrinking the balance sheet, and promoting looser policy on the premise of AI-driven deflation—are unlikely to gain majority support within the FOMC. The end result will be a series of “seemingly significant changes for Walsh, but of limited impact for other officials.”

According to the Chasing Wind Trading Desk, Fed Chair Walsh recently announced the establishment of “five major monetary policy working groups,” aiming to reshape the Federal Reserve in five dimensions: communication mechanisms, balance sheet, data collection, AI and productivity, and the inflation framework. However, in its July 20th research report, Goldman Sachs offered a sober reality check: if investors are betting that Walsh can push for the current rate cuts (dovish monetary policy) by leveraging the narrative that “AI has a structural deflation effect,” they are destined for disappointment.

Goldman Sachs notes that although Walsh, as Chair, wields significant influence in press conferences and other communication channels, his aggressive proposals (such as drastic balance sheet reduction and adopting dovish policy based on AI expectations) are in significant conflict with the institutional inertia of the Federal Open Market Committee (FOMC).

Therefore, the bank believes the path of Fed policy will not make a drastic turn. It is extremely difficult for the FOMC to agree on pursuing an easy policy today based on forecasts of future productivity. For the balance sheet and forward guidance, the ultimate outcome will most likely be a compromise solution that “superficially satisfies Walsh, but is of limited real impact” (such as ceasing to publish the median in the dot plot, or minor tweaks in the composition of asset purchases). The Treasury will also adjust debt issuance strategies to offset market shocks from changes in the Fed's asset structure.

Goldman Sachs maintains its federal funds rate forecast, expecting the target range to remain at 3.50%-3.75% for all of 2026, gradually declining to 3.00%-3.25% in 2027.

Working Group 1: Communication Mechanism—The “Dot Plot” May Be Marginalized but Won’t Disappear

Walsh’s stance: Advocates a significant reduction in forward guidance, and so far has rarely even commented on his own economic outlook.

Working group leaders: Economist Peter Fisher (University of Washington), former President of the Central Bank of Brazil Arminio Fraga, and former Governor of the Bank of England Mervyn King. Their common position is that the central bank should clearly articulate its reaction function, while acknowledging the uncertainty of forecasts.

Core controversy: Whether or not to revise the “Summary of Economic Projections” (SEP), especially the interest rate projection section known as the “dot plot.”

Goldman Sachs points out that the FOMC already discussed communication reform last year but failed to reach a consensus, making it even harder to push for major changes again in the near term. Walsh has hinted at a possible elimination of the dot plot, and a minority of FOMC members also have reservations about the current practice, but Goldman Sachs believes that outright abolishing the dot plot would be too great a step backward in terms of transparency for most officials.

The most likely compromise: Adopting the suggestion of former Vice Chair Don Kohn—to stop publishing the median forecast in the SEP, thereby avoiding outsiders interpreting it as an official endorsement by the FOMC. While this change is symbolically significant for Walsh, investors could still calculate the median themselves, resulting in limited actual information loss.

Additionally, Goldman Sachs suggests two ways to enhance the transparency of the reaction function: One, linking each member’s economic and interest rate forecasts; two, publishing scenario analyses by Fed staff. Currently, the eight-page uncertainty quantification materials appended to the SEP receive almost no market attention.

Working Group 2: Balance Sheet—The “Ample Reserves” Framework Is Hard to Shake

Walsh’s stance: A long-time critic of quantitative easing (QE) and the Fed’s massive balance sheet, he calls for a review of the “ample reserves” mechanism and the structure of asset holdings. But he has recently acknowledged, “I’m not naïve enough to think that we can return to the state of the Fed when I joined in 2006.”

Working group leaders: Harvard professor of economics Karen Dynan, University of Chicago professor Raghuram Rajan (former Governor of the Reserve Bank of India), and Harvard professor Jeremy Stein (former Fed Governor).

The three hold differing views: Stein, in a Jackson Hole research paper, argued that a large balance sheet helps financial stability, as ample reserves reduce intermediaries’ incentive to seek short-term run-prone funding; Rajan, however, warns that balance sheet expansion has a “ratchet effect”—banks’ business models evolved during QE with deposit surges, but it’s hard to fully reverse during balance sheet reduction.

Goldman Sachs’ view: Almost no one within the FOMC supports abandoning the ample reserves framework, and the room to shrink the balance sheet by compressing banks’ reserve demand via regulation is extremely limited. The ratchet effect is seen more as a reason for raising the bar for future QE, rather than as an immediate major problem.

The real unsettled question: What assets should the Fed hold over the long term? The two options are: purchasing Treasurys according to Treasury Department issuance proportions (respecting the Treasury’s debt management role), or mainly holding short-term bills (to match asset-liability duration and reduce profit volatility). Goldman Sachs believes that whichever the Fed chooses, the Treasury can adjust its issuance strategy to offset it, meaning the net impact on interest rates is quite limited.

Working Group 3: Data Quality—Private Data Is a Supplement, Not a Replacement

Walsh’s stance: Criticizes “old-school survey methods” and the ease with which official statistics are revised, and calls for the Fed and statistical agencies to use more private data, especially new ways to measure inflation.

Working group leaders: Harvard professor Raj Chetty, University of Chicago professor Kevin Murphy, former Walmart CEO Doug McMillon. Chetty’s “Opportunity Insights” lab was first during the pandemic to systematically track employment and consumption in real time using data from credit card processors, payroll services, and other private sources.

Goldman’s assessment: The effort to utilize private data has been underway for years at both the Fed and statistical agencies. There is no debate over this direction, but these efforts face increasingly severe budget constraints.

The key challenge is that private data often fails to meet three core requirements for high-quality economic statistics: representativeness, accurate seasonal adjustment, and continuity. For example, “Opportunity Insights” employment data already diverge significantly from nonfarm payroll figures. More seriously, some businesses that started providing data during the pandemic have since stopped, whereas official statistical series need to remain continuously comparable over decades.

Goldman Sachs’ judgment: Private data will more likely remain as a supplement rather than a substitute for official data, and raw data will still need to be processed by Fed staff or statistical agencies for policy use.

Working Group 4: AI and Productivity—The “Future Deflation” Argument Is Not Sufficient to Support Current Rate Cuts

Walsh’s stance: Believes AI will have a “structural deflation” effect, with an impact possibly on a different scale from past technological advances.

Working group leaders: Marc Andreessen, co-founder of Andreessen Horowitz; Microsoft Xbox CEO Asha Sharma; Stanford professor Charles Jones (currently on leave at Anthropic).

Jones, in a recent NBER working paper, concluded that AI will eventually significantly boost productivity, but since tasks still requiring humans will act as bottlenecks, the full impact will take considerable time to manifest, which in turn gives the labor market time to adjust.

Goldman Sachs’ historical research found that in periods of accelerated technological progress, on average there is slightly higher occupational substitution and unemployment, and slightly lower inflation, enabling the Fed to cut rates modestly to support labor market transitions.

However, Goldman Sachs makes it clear that this logic does not suffice to support the current dovish stance for two reasons: First, productivity forecasts have historically been extremely difficult to get right—even at the end of the last economic cycle, forecasts were quite pessimistic; second, several FOMC members have already emphasized the near-term inflationary pressures arising from AI-related demand, which contrasts with Walsh’s more relaxed approach.

Goldman Sachs’ conclusion: Most FOMC members will be skeptical of arguments to adopt looser policy today based on the prospect of future AI-driven productivity gains. Walsh references the Greenspan era as a precedent—when strong productivity growth did not prompt hikes despite robust GDP—which may be acknowledged, but pushing for rate cuts now on the grounds of future productivity expectations is unlikely to gain support.

Working Group 5: Inflation Framework—Limited Monetarist Comeback, Supply Shock Response Is a Consensus

Working group leaders: Harvard economics professor Greg Mankiw (former Chair of the Council of Economic Advisers), New York University economics professor Thomas Sargent (Nobel Prize winner), C.D. Howe Institute Senior Fellow William White (former BIS economic adviser).

Goldman Sachs’ Analysis of Three Major Topics:

① Inflation target statement: Both Walsh and Mankiw advocate defining the inflation target as “2%” (not “2.0%”) to avoid overreacting to minor deviations. Goldman sees this as uncontroversial in the current environment.

② Monetary aggregates: Walsh advocates a renewed focus on money supply indicators, but stated in a congressional hearing that “I am not a monetarist.” Mankiw also said “maybe it’s time to reconsider the neglect of monetary aggregates.” Goldman uses price-based financial conditions indicators, not quantity indicators like M2, in its forecasts. Fed staff may be skeptical of traditional monetary aggregates, but are open to exploring whether alternative measures like the Divisia index could improve inflation forecast models.

Worth noting: Walsh has already included M2 in the latest Monetary Policy Report, but Fed staff added a mild disclaimer: “In the modern economy, the money stock is hard to measure precisely.”

③ Responding to supply shocks: The frequency of supply shocks has increased significantly since 2020. Walsh’s stance—to ensure that initial price shocks do not “spread and persist”—is expected to win wide support among Fed officials. Goldman tracks measures of the breadth of inflation to assess this risk, but points out that estimating the duration of supply shocks remains a central challenge, with no simple answer available from economic theory or the working group.