By Howard Schneider
June 26 (Reuters) - U.S. Federal Reserve Chairman Kevin Warsh has tapped veteran Fed staff economists Daniel Covitz and Eric Engstrom to serve as advisers, experts whose recent work included a critical look at the Fed's Summary of Economic Projections and the reasons behind rising U.S. Treasury yields.
The appointments were first reported by the Wall Street Journal and confirmed by a source familiar with them.
Staff advisers to Fed board members serve as day-to-day reference points
for research and analysis, crafting remarks and vetting ideas.
Warsh has also hired two outside advisers on a contract basis, former Heritage Foundation fellow Paul Winfree and Daniel Heil of Stanford University's Hoover Institution, to help with a transition that includes the launch of five task forces to study different aspects of the Fed's operations and the economy.
Covitz, deputy director of the Fed's Research and Statistics Division, worked with Warsh when he was a member of the Fed's Board of Governors from 2006 to 2011, and according to his Fed bio is currently doing research on asset bubbles and the stability of short-term credit markets.
Engstrom, associate director of the Fed's monetary affairs division, recently published an analysis concluding that the Fed's quarterly Summary of Economic Projections improved market forecasts when they are released, but over time became an "anchor" that slowed the speed at which private analysts updated their outlook based on new economic information.
Warsh is a critic of Fed forward guidance, including the "dot plot" of interest rate projections that he feels is construed as a policy forecast and makes officials less nimble in adapting as conditions change.
The two economists also combined on a recent paper looking at why U.S. Treasury yields remained elevated even as the Fed in 2024 and 2025 cut the short-term overnight interest rate it uses to influence the economy and inflation.
Headlined "Old risks reemerge in an era of Fed credibility," they concluded that bond investors were growing worried about U.S. fiscal deficits and the possible frequency of future supply shocks, not about the Fed's ability or commitment to meet its 2% inflation target.
"We find no evidence that an increase in far-ahead inflation risk has played a role in the rise in far-forward rates," Engstrom and Covitz concluded. "Our results suggest a new(ish) era of risks for asset pricing, one in which two old risks — adverse supply shocks and fiscal unsustainability — have reemerged."
(Reporting by Gnaneshwar Rajan in Bengaluru and Howard Schneider in Washington; Editing by Aidan Lewis and Andrea Ricci)
