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Federal Reserve Chair Kevin Warsh on Friday delivered his first keynote at the annual monetary policy conference in Jackson Hole, Wyoming, against a backdrop of uncertainty over inflation, as well as how he will guide policymakers as they consider interest rate moves.
Warsh’s speech comes as the Federal Reserve has held interest rates steady at each of its five meetings so far this year amid persistent inflation, which moved further away from the central bank’s 2% target amid the Iran war.
The annual Jackson Hole conference, which features central bank leaders from around the world, is historically an opportunity for the Fed chair to reset expectations about monetary policy and give their perspective on how economic conditions are developing over the near- and long-term.
Warsh is opposed to giving so-called forward guidance about how policymakers will approach upcoming monetary policy moves, and has taken steps to remove such language from the Fed’s post-meeting statements. That has left some Fed watchers hoping for a clearer view into how Warsh evaluates incoming data and views the economy’s path ahead.
The Fed chair offered an overview of his speech – joking that it could be called an outline or trail map, but not forward guidance – and said he plans to discuss the practice of forward guidance and how markets and the central bank interact. He also said he would address the impact of artificial intelligence (AI) on the economy, as well as key principles for monetary policy and his current view of the economy.
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“With the unchanging picture of the Tetons as our backdrop, we are here to survey an economic landscape that is anything but static,” Warsh said, saying that the world is at a hinge point in history.
He said that progress in AI has been faster than anticipated and that the “potential for substantially higher growth is on the rise. Ever-expanding pools of capital pouring into AI-related infrastructure of all sorts. A kind of super Moore’s law seems to be playing out.”
Warsh noted the Fed created an AI task force that will track things like the impact of AI on productivity, jobs and employment, how the industry is developing and how returns are accruing across the labs, chipmakers, energy producers and cloud providers driving it.
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On forward guidance, the Fed chair acknowledged his “long-time discomfort with early pronouncements of future policy decisions,” and offered his own view that “transparency and communications about future policy decisions is not an end unto itself.”
“Forward guidance as a regular practice was adopted by my colleagues and me during the global financial crisis. It was essential at the time, and we introduced it with much fanfare. But as with other legacies of crises past, I believe the practice has outstayed its welcome,” he explained.
Warsh said that in ordinary times, forward guidance should be “limited and circumscribed” because otherwise, it would risk “creating ambiguity in the name of clarity over sharing policy deliberations and committing to future decisions that can lead markets, businesses and households astray.”
“In my view, the Fed should be humble and never naive. The Fed plays an essential role in the economy and markets. Our tools are powerful. We determine the path of short-term interest rates, and market participants will always try to anticipate what we will do next. But we should not indulge a regime in which market participants are looking primarily to the Fed for their next trade,” Warsh explained.
“If the Fed gets inflation wrong and judges the economy wrong, who gets the worst of it? Not the financial high-fliers. Hardworking Americans are the ones left to deal with inflation that’s too high, or jobs that suddenly appear less secure,” he added.
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Warsh discussed his principles for monetary policy, including that the data the Fed relies on must be “relevant, contemporaneous, accurate and as actionable as possible.” He continued to say that the Fed’s actions are aimed at ensuring the aggregate demand side of the economy is broadly consistent with aggregate supply, though it’s an imprecise balance.
“There should be no misunderstanding. The Fed’s price stability objective of 2%, as measured by the PCE price index, is a firm, fixed target. Let me be equally clear about another aspect of this. Subjective price stability is not self-executing, nor is inflation necessarily mean reverting. It is the Fed’s job to deliver stable prices, no excuses,” Warsh said.
He added that the Fed also bears responsibility for maximum employment, the second component of the central bank’s dual mandate, and said that he doesn’t believe that the “Fed’s dual mandate works across purposes. After all, high inflation itself is very harmful to economic prosperity.”
Other principles Warsh discussed were that short-term interest rates are the predominant tool for achieving the dual mandate, while noting that “unconventional policies to spur economic activity may suit genuine crises of which we all have much experience, but they should otherwise be used sparingly, if at all.”
The central bank’s impact on the supply of money should also receive closer attention for their impact on financial conditions and prices. He also said that a “quieter Fed, a more purposeful Fed in its communications is better able to meet its objectives, and we can be held accountable for delivering on our remit, the only true test of our credibility.”
Warsh also offered an outlook for the economy, noting that the Federal Open Market Committee (FOMC) view of the economy in July was that “labor markets were stable, output solid, but inflation remained too high,” which led the Fed to hold rates steady and remain at the ready to act as circumstances require.
“For my part, as we sit here, I’m impressed by the overall performance of the economy, which appears to have strengthened,” Warsh said while noting that both Main Street and Wall Street have shown resiliency in the face of economic shocks.
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He said that firms in the S&P 500 Index have seen profits grow over 20% in the past year, with profit margins “quite elevated” relative to history, with low volatility in the market. Warsh noted strain in certain sectors, including housing and agriculture, but added he “would be hard-pressed to describe broad financial conditions as restrictive.”
“Labor markets are quite stable. The jobless rate at 4.1% remains low by historical standards and hasn’t changed much in a couple of years,” Warsh said. “In my view, the relatively low turnover in today’s labor market is partly a result of the significant matching between employers and employees that happened in the post-pandemic environment.”
“But when labor supply is barely growing, monthly job gains are naturally going to run low. There are always areas of concern in the labor market, for example, among recent college graduates… But as of now, I believe the labor markets are broadly consistent with full employment,” he said.
“On the price stability side of our mandate, the numbers are more concerning,” Warsh said, noting that PCE inflation is at 3.7% year over year and that “inflation is running above our 2% target, so the Fed’s predominant focus right now should be on prices.”
While PCE and CPI inflation have “fallen significantly from their highs of a few years ago,” the progress in the last couple of years has been more modest and recent readings “do not tell me that underlying trends have meaningfully improved.”
Warsh said that the responsibility for “65 months of sustained, elevated inflation sits squarely with the central bank, and that’s where it belongs. So here is my standard: we must be confident that underlying inflation is moving to our objective clearly and at sufficient speed, otherwise we have work to do.”
The Fed chair concluded by saying that it’s a “tremendous honor to serve once again at the Federal Reserve,” and that he is “truly grateful for the encouragement, good counsel, and the warm reception I’ve received in my first 100 days from my colleagues.”
