Fed Chair Kevin Warsh’s Jackson Hole Debut: Ending Forward Guidance Amid AI and Inflation

Editor’s Note: At 10:00 PM Beijing time on August 28, Federal Reserve Chair Kevin Warsh delivered a speech at the Jackson Hole Global Central Bank Symposium, marking his first address at this prestigious central bank conference since assuming the role of Fed Chair.

In his speech, Kevin Warsh stated that the "forward guidance" tool, designed for extraordinary times, has fulfilled its purpose in normal economic conditions and should be retired; monetary policy must return to a data-dependent and disciplined approach.

In the face of artificial intelligence as a transformative force, he acknowledged that its profound impacts on productivity, labor markets, and the structure of capital returns remain uncertain, and the Fed must maintain a cautious watch. At the same time, he clearly outlined seven guiding principles for policy implementation: anchoring to a 2% inflation target, balancing the employment mandate, using the short-term interest rate as the primary tool, monitoring the money supply, and maintaining restrained and purposeful communication. These principles outline a governance approach that returns to orthodoxy and avoids policy overreach.

In his assessment of economic conditions, he noted that the labor market is broadly consistent with full employment, but inflation remains significantly above target—PCE inflation stands at 3.7% year-over-year, with more than half of its components rising by more than 3%. He pledged not to pre-determine a policy path but made clear that the Fed “has more work to do” unless it is confident that inflation is moving decisively toward its target. The overall message conveys a stance that prioritizes discipline over specific decisions: exercising humility in the face of uncertainty and unwavering commitment to responsibility. Monetary policy now stands at a new crossroads, and this chairman has chosen to earn market trust through steadiness rather than boldness, and through transparency rather than promises.

The full text of Kevin Warsh's speech, translated by Odaily Planet Daily, Enjoy~

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Thank you all. I’m delighted to be back here and to see so many familiar faces. I’ve been looking forward to this weekend—where else would be more fitting to mark my 100th day as Chair of the Federal Reserve? Thank you to Jeff Schmid, President of the Federal Reserve Bank of Kansas City, and his colleagues for this wonderful hospitality. Jeff, thank you to all of you.

Years ago, I learned that there are two vastly different hiking trails around Jackson Hole. I can summarize my hike with former Federal Reserve Vice Chair Don Kohn in two words: **I survived.** Those grueling, marathon-like “death marches” revealed a side of Don Kohn that I was completely unprepared for.

There’s another way to hike—I’d associate it with my former colleague, former Federal Reserve Chair Ben Bernanke. Hiking with Ben is much more leisurely, a gentle stroll along the winding trails of the Rockefeller Preserve.

So, before you set out, do a quick "health check" and ask yourself: "Is today a Cohen day or a Bernanke day?"

The theme of this meeting is innovation. I believe that the public and the market—through collective wisdom—understand that innovation in the Federal Reserve’s policy implementation approach will help achieve price stability while fostering maximum employment.

Let me briefly introduce what I covered in my presentation this morning. You can call it an outline… or a roadmap… but please don’t call it “forward guidance.”

First, I will discuss some long-term issues the Federal Reserve is considering, including the latest general-purpose technology—artificial intelligence (AI)—and where it might lead the economy. Then, I will address the policy practice of forward guidance and the interaction between central banks and financial markets. Next, I will outline several key principles I believe should guide the implementation of monetary policy. Finally, I will share my assessment of the current economic situation.

Against the backdrop of the timeless Teton Mountains, we are here to examine an economic landscape that is anything but static. Not long ago—on the eve of the 2008 crisis and throughout the following decade—economists and policymakers spoke of “secular stagnation” and “global savings glut.” A widely held view at the time was that vast amounts of capital would remain idle, as there simply weren’t enough compelling investment opportunities. It seemed that everything good had already been invented.

Therefore, economic growth will be weak and slow. Well, times have indeed changed dramatically. We have reached a turning point in history.

The most obvious example is the advancement of artificial intelligence—a term that has existed for 80 years but now describes the latest generation of technology, whose pace of development has even surpassed the predictions of earlier tech evangelists. The potential for significantly higher economic growth is rising. Growing pools of capital are flooding into various AI-related infrastructures. A phenomenon akin to a **"super Moore's Law"** appears to be taking place. The rules of scaling are also changing, altering both the way and the speed of innovation.

Capital and labor combined to create the large language models at the heart of AI. Users purchase tokens to gain access to these models.

According to reports, the token sales from just two leading AI labs have already surpassed $100 billion on an annualized basis, representing more than a 500% increase from a year ago. The Federal Reserve is closely monitoring all of this.

We recognize that AI is a new variable—and potentially a new factor of production—that will impact the economy and the implementation of monetary policy.

This raises a series of important questions: Will the application of AI lead to significant and sustained increases in productivity across the entire economy? If so, when will this increase occur? Will the use of tokens complement or compete with labor? Will the next generation of AI models require higher capital intensity, or can the models themselves help design solutions that require less capital investment?

Another unresolved issue is the resulting market structure. It is still unclear where capital returns will ultimately end up or how long this process will take. In the early stages, how much surplus value will flow to owners of scarce assets—AI labs, chip manufacturers, energy producers, and cloud service providers? Over time, how much value will shift to businesses and consumers? What broad implications will this have for workers and the Federal Reserve’s employment goals?

Similarly, we still do not know the equilibrium price of tokens. Will different types of tokens emerge, causing people to be willing to pay increasingly more for access to the most advanced and superior models? Will the token prices for older models eventually fall to the level of marginal cost?

However, it is important to clarify that their recommendations will be proposed later and will not affect our decisions under the current policy landscape. Nevertheless, I believe that the intellectual investment we make today will better prepare us for future policy challenges.

While our working group was underway, I did not wait to begin introducing innovations at the Federal Reserve to ensure it could adapt to future needs.

For example, I have already begun to alter the form and function of what the Chair of the Federal Reserve calls “forward guidance.” Many of you may know that I have long been uncomfortable with prematurely announcing future policy decisions.

I prefer another path... I'll explain why below.

Transparent communication about future policy decisions is not in itself a virtue; communication must serve the Fed’s most important responsibility: delivering sound monetary policy.

Forward guidance, as a conventional policy tool, was adopted by me and my colleagues during the global financial crisis. At the time, it was crucial, and we introduced it in a highly visible manner. However, like other legacies left by past crises, I believe forward guidance has outlived its appropriate period of use. During normal times, the role of forward guidance should be limited and kept within clear boundaries.

Otherwise, it may create confusion under the guise of clarity.

Overdisclosing the policy discussion process and making excessive commitments about future decisions can mislead markets, businesses, and households. Moreover, I believe that when policymakers make a quasi-commitment on interest rates throughout the policy cycle, we actually restrict our own freedom to make the right decisions when those decisions are truly needed.

To craft effective policy, we must properly manage the relationship between financial markets and the central bank. The Federal Reserve needs clear market signals, and these signals should be as unfiltered as possible, including internal market indicators, levels and changes in asset prices across different markets and sectors, prices and trading volumes of U.S. Treasuries, the foreign exchange value of the dollar, the cost and availability of credit, and prices of broad commodities. These indicators, along with others, should assist the Federal Reserve in assessing short-term economic activity and inflation prospects throughout the economic cycle.

The Federal Reserve should remain humble, but never naive. The Fed plays a vital role in the economy and markets. Our policy tools are also powerful—we determine the path of short-term interest rates, and market participants will always try to anticipate our next move. But we should not enable a system where market participants rely primarily on the Fed to decide their next trade.

Economic literature has long described the distortions caused by this mechanism, known as the "hall-of-mirrors problem." If markets heavily rely on the Fed’s guidance, and the Fed in turn relies on market prices, we are all more likely to miss emerging developments, be caught off guard when conditions shift, and make errors in the policy-making process.

Ironically, market participants may not be the ones bearing the greatest cost in the “funhouse mirror” problem. The most severe harm is likely to fall on those without financial assets. If the Federal Reserve misjudges inflation and also misjudges the economy, who will be most affected? Not the winners in the financial markets. It is hardworking Americans who must confront either persistently high inflation or suddenly less stable jobs.

So, if forward guidance isn’t suitable for normal times, shouldn’t the new Fed chair at least commit to a clear reaction function? For instance, if data comes in hot or weak, should he tell us how interest rates will respond? I wish our understanding of the economy were precise enough to offer a mechanical, well-tested answer—such as one strictly based on a simple function like the Taylor Rule. But our knowledge hasn’t reached that level yet—at least not now. Moreover, the most critical factors for properly implementing monetary policy also change over time.

Using forecasts to represent the Fed’s reaction function is more effective in theory than in practice, and more effective in the lab than in the real world. I am not the only one to have noticed, for example, that forward guidance in 2021 likely slowed the Fed’s policy response to high inflation. During my tenure as chair, my colleagues and I will work to build more reliable models and more robust rules to guide policy decisions.

We will do so while clearly recognizing that the accuracy of economic forecasts remains merely an aspiration. Geopolitical factors, global supply chains, and technology are changing so rapidly and dramatically that it is wise to maintain modesty about what we can and cannot know. In the same spirit, we should fully consider a wide range of perspectives on any issue that could influence the Federal Reserve’s monetary policy decisions. If our goal is to achieve the best possible decisions, we should not dismiss differing views on the state of the economy.

So, how can we find a better path for policy-making?

In the following talk, I will share some key principles that guide my thinking on how to appropriately implement monetary policy...

Then, here is my promised assessment of the economic situation.

Now let's discuss these principles.

First, I’ve noticed that in this work, yesterday’s news can easily be mistaken for current events. The challenge lies in distinguishing between the two. In other words, we must examine reality to ensure we don’t formulate forward-looking policies based on outdated or inaccurate data. We should also avoid relying on isolated data points—trends matter most. The Federal Reserve is an institution responsible for making decisions. We make choices amid uncertainty, so the data we rely on must be as relevant, timely, accurate, and actionable as possible.

Second, the purpose of the Federal Reserve’s actions is to ensure that aggregate demand in the economy roughly aligns with aggregate supply. However, what we can directly observe is only economic activity. We can never directly see what is happening on the supply side—we can only infer it. Therefore, assessing the balance between current and future aggregate supply and aggregate demand is inherently imprecise.

Third, it must be clear that there is no room for misunderstanding: the Federal Reserve’s 2% price stability target, measured by the Personal Consumption Expenditures (PCE) price index, is a firm and fixed goal. Similarly, we must also clarify another aspect of this objective: price stability does not occur automatically, and inflation does not inevitably return on its own. Achieving price stability is the Federal Reserve’s responsibility.

Fourth, the Federal Reserve is also responsible for achieving maximum employment. In the medium term, fulfilling the dual mandate is not an either-or choice. I do not believe the Fed’s dual mandate conflicts with itself. After all, high inflation itself severely undermines economic prosperity.

Fifth, short-term interest rates are the primary tool for achieving the dual mandate. Unconventional policies aimed at stimulating economic activity may be appropriate during genuine crises, but they should be used cautiously beyond those periods—and ideally not used at all.

Sixth, money matters. While it may not be fashionable to say so today, my view is that money and monetary policy are critically important. We should pay attention to money created by central banks, as well as money generated by the banking and financial systems. Certainly, financial innovation and other factors have altered the transmission mechanisms between the monetary base, money velocity, and the broader economy. But this is hardly sufficient justification for ignoring how money ultimately influences financial conditions and prices.

Ultimately, a quieter, more purposefully communicative Federal Reserve is better equipped to achieve its goals. We can also be held accountable based on whether we fulfill our responsibilities—this is the only true measure of our credibility. As U.S. Air Force General Chuck Yeager once said: “When the moment of truth comes, either you have a reason, or you have results.”

Now, based on these principles, how do I view today’s economy? What exactly is happening in the economy outside our window? Many may have already seen the Federal Open Market Committee’s (FOMC) consensus in the July meeting minutes: the labor market remains solid, and output is performing strongly. However, inflation is still too high.

Most of my colleagues and I believe it would be wiser to wait for new information between meetings—particularly given potential developments in supply chains, investment flows, and geopolitics—before deciding whether a change in monetary policy is necessary. We also collectively expressed our willingness to act as circumstances require. Personally, what struck me today was the overall strength of the economy; it appears to have strengthened.

One indicator of an economy's strength is its ability to withstand shocks. In this regard, both the real economy and Wall Street have demonstrated extraordinary resilience. I’d like to share a few observations.

Corporate capital expenditures—the "seed grain" for future economic growth—are accelerating rapidly. The quarterly change rate for investment in equipment and intangible assets is around 9%, the highest pace since 2021. More than half of this year’s capital expenditure growth is likely attributable to AI-related construction. For S&P 500 companies, profits have risen over 20% over the past year. Profit margins are relatively high compared to historical levels. Overall stock market volatility remains low. We are closely monitoring market internals to observe performance across sectors. Expectations for capital spending and corporate profit growth are currently very high.

I will continue to monitor changes in their growth rates—that is, the second-order change (second derivative). The subsequent impacts on asset prices, business confidence, consumer income, and spending are equally important and require assessment. Credit spreads on corporate bonds and leveraged loans are near the lower end of their historical ranges, and issuance in these markets has been robust this year. Shifting focus from fixed income markets to banking, the July Senior Loan Officer Opinion Survey reported that banks have set commercial and industrial loan standards at the more accommodative end of their historical range, helping to explain the growth in these loans this year.

There are few signs of policy tightening in the credit and loan markets, and certain sectors—such as housing and agriculture—are under pressure. However, overall, I would find it difficult to agree that broad financial conditions are clearly restrictive. Despite various shocks, real consumer spending has remained robust, growing by more than 2% over the past four quarters. Since the beginning of the year, PDFP growth has approached 3%. This metric typically contains more meaningful signals than GDP, and the trend here is similarly positive.

On the employment side of the Federal Reserve’s dual mandate, our country is performing well. The labor market remains quite stable. The current unemployment rate of 4.1% is still low by historical standards and has seen little change over the past several years. The number of initial claims for unemployment insurance, calculated as a four-week moving average—a well-established, highly timely indicator—is near multi-decade lows. In my view, the currently low level of labor market churn is partly due to the large-scale reallocation between employers and workers that occurred in the post-pandemic period. With labor supply nearly stagnant, monthly job gains naturally remain at lower levels. There are always areas of concern in the labor market—such as recent graduates. But overall, those who want to work are largely either keeping their jobs or finding them.

They may be concerned about potential future disruptions in the labor market, but for now, I believe the labor market is consistent with full employment. However, on the price stability side of our dual mandate, the situation is more concerning. The Federal Reserve’s preferred inflation measure—the 12-month year-over-year increase in the PCE price index—is currently at 3.7%, with a 6-month change rate of 4.1%. The corresponding measures for the Consumer Price Index (CPI) are similarly elevated, as are the core inflation metrics for both PCE and CPI. While none of these indicators are perfect, they all tell a similar story:

Inflation remains above our 2% target. Therefore, the Federal Reserve’s primary focus at this time should be on prices. The task of policymakers is to identify underlying trend inflation—the general movement of prices in the economy, excluding the effects of temporary or special factors. We aim to determine whether underlying inflation is rising, falling, or stagnating. We seek not only to understand its direction but also its pace. All of these broad inflation indicators have declined significantly from their peaks in 2022.

To assess potential inflation, I found it helpful to break down the 199 components of the PCE price index. Over the past 12 months, 54% of the goods and services in the PCE basket experienced price increases exceeding 3%. This percentage is significantly lower than the post-pandemic peak of approximately 77%, but still notably higher than the 32% observed over the 20 years prior to the pandemic. A similar pattern emerges when examining the past six months: 49% of goods and services in the PCE basket posted annualized price increases above 3%. Again, this figure is well below the post-pandemic high but remains at a relatively elevated level.

The recent overall rise in commodity prices is also worth noting. We need to determine whether these trends signal an upward risk to inflation. Equally important is assessing whether inflation over the past five years has become embedded in inflation expectations. The good news is that medium-term inflation expectations indicators appear broadly stable. Inflation compensation measures in the swaps market also convey a strong and consistent message. Particularly given recent developments, market prices still reflect confidence in the Federal Reserve’s ability to achieve price stability—a testament to the institution and in line with its best traditions.

I can assure everyone... they are right.

From the perspective of economic history, a characteristic of market-measured inflation expectations is that they often appear very strong and stable just before they become unanchored. These expectations are not easily swayed, and currently, they remain firmly anchored. However, we must closely monitor them. Ensuring that inflation expectations do not become unanchored is the Federal Reserve’s responsibility. There is one signal that no one can ignore: 65 consecutive months of elevated inflation clearly place the responsibility on central banks—and this responsibility has always belonged to central banks.

My standard is: We must be confident that underlying inflation is moving toward our target, and that it is doing so clearly and sufficiently quickly. Otherwise, we still have work to do. This is our job… our mission… and the responsibility we must uphold.

Today, I am committing to a discipline, not a specific decision. My colleagues at the Federal Reserve are not the first to hold these positions at such a critical juncture. We are determined to honor the time and seize the moment, doing our utmost to fulfill our duties. We take our responsibilities seriously, with both humility and resolve. Too much depends on the choices we make. Sound monetary policy can help households and businesses thrive. When effectively implemented, monetary policy can expand and deepen the momentum of economic growth... and help solidify America’s leadership in the world.

I understand that our nation requires us to think deeply, judge carefully, and act wisely. It is an immense honor to serve again at the Federal Reserve. I sincerely thank my colleagues—and many of you here—for your encouragement and valuable advice. Thank you all for your attention this morning.