Get ready for an overdue Fed overhaul

Unless the next Fed chair shakes the institution out of complacency, continued policy-induced volatility and intensifying political attacks are all but guaranteed

- MOHAMED A EL-ERIAN

TODAY, THERE IS a level of discord within the United States Federal Reserve that has rarely been seen in modern history.Nearly all experienced market analysts agree that the coming Fed policy meetings could prove unusually divisive, owing to conflicting economic views, political sensitivities, and inherent biases. The tension is palpable and has led to wild fluctuations in what markets expect the Fed will do.

But, while the media fixate on who will or won’t support interest-rate cuts, what matters is not simply that the Fed is deeply divided, but how to make it more effective.

To answer this question, one must first understand the challenges the Fed is facing—beginning with insufficient data. Following the longest government shutdown in US history, the data the Fed is receiving are incomplete, uncertain, and subject to unusually large revisions. For a central bank that is highly data dependent, this is tantamount to flying blind.

This lack of clarity about the US economy’s performance compounds the second challenge, arising from the Fed's dual mandate of targeting price stability and maximum employment. Historically, policies that advanced one objective did not undermine the other. Today, however, these imperatives are pulling in opposite directions—and dividing Fed officials. While the “hawks” remain focused on price stability, pointing out that both core and headline inflation are running around one percentage point above the Fed’s target, the “doves” are becoming increasingly concerned about weakening labour-market indicators.