Caixin Media

At 22:00 Beijing time on Friday evening, Federal Reserve Chair Kevin Warsh appeared at the Jackson Hole Symposium and delivered a speech titled "In Our Time."

Overall, Wash's speech at Jackson Hole conveyed a clear cautious hawkish signal. He believes that the U.S. economy and labor market remain resilient, the current financial environment is far from clearly restrictive, and inflation is still significantly above the Fed’s 2% target; therefore, price stability should remain the primary focus of monetary policy.

The Chair of the Federal Reserve emphasized in the speech: "My standard is: We must be confident that underlying inflation is clearly and sufficiently rapidly moving toward our target. Otherwise, we still have work to do."

Wash also stated that although the summer CPI and PCE price data came in better than expected, "they have not led me to believe that the underlying inflation trend has improved meaningfully."

In response to external criticism that he "refuses to provide forward guidance," Walsh seized this opportunity to offer an unprecedentedly in-depth explanation.

Wash believes that forward guidance is necessary during crises but should be significantly weakened during normal times. He argues that prematurely signaling or even implying a commitment to future interest rate paths may appear to enhance transparency, but in reality, it can create new misconceptions: on one hand, it constrains the Fed’s ability to make flexible decisions in response to economic changes; on the other hand, it encourages markets to overfocus on “guessing the Fed” rather than independently assessing economic fundamentals.

He is particularly wary of the resulting "hall of mirrors" problem—where markets price assets based on Fed guidance, and the Fed, in turn, references market prices to make its own judgments, potentially causing both sides to overlook new economic developments.

To this end, Walsh neither supports常态化前瞻指引 nor favors a mechanical policy "reaction function"; instead, he prefers to reduce prior commitments, allowing markets to form their own judgments, while ensuring the Fed retains sufficient flexibility at each actual decision point, guided by real-time data, trends, and more robust policy rules.

As of 22:45 Beijing time, following Walsh’s speech, the CME FedWatch tool showed the probability of a Fed rate hike in September rising to nearly 60%, up from 35% yesterday. Spot gold plunged $50 in the short term, with the latest price falling to around $4,550 per ounce.

(Source: TradingView)

Below is the full translation of Wash's speech (speech source: Federal Reserve website, translated with AI assistance):

Thank you all. I'm delighted to be here again 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?

Everyone here owes a thank you to Jeff Schmid, President of the Kansas City Fed, and his colleagues for their warm and thoughtful hospitality. Jeff, thank you to all of you.

Jeff and the other organizers have arranged some leisure activities for later today. I recommend that everyone be very careful when making their choices.

As I learned many years ago, on the trails around Jackson Hole, you can experience two completely different kinds of hikes. I can summarize my hike with former Federal Reserve Vice Chair Don Kohn in two words: I survived. Those marathon-style “death marches,” sustained by sheer willpower, revealed to me a side of Don that I was utterly unprepared for.

There’s another kind of hike—I’d associate it with my former colleague and ex-Fed Chair Ben Bernanke. Walking with Ben, the pace is much more relaxed, just a leisurely stroll along the winding trails of the Rockefeller Preserve.

So, before you set out, check your physical condition and ask yourself: "Is today a Cohen day or a Bernanke day?"

The best thing about this gathering is that it helps all of us clear our minds and think more clearly about the world and era we live in. For me, this is the right place, and you are the right audience, allowing us to truly delve into the most important ideas.

“Innovation” is the theme of this conference. I believe that the public and the market, through their collective wisdom, have recognized that innovation in the Federal Reserve’s policy implementation approach will help us achieve price stability while attaining maximum employment.

Below is a brief overview of what I discussed this morning. You can call it an outline... or a hiking map... but please don't call it "forward guidance."

First, I’ll discuss several long-term issues the Federal Reserve is currently examining, including the latest general-purpose technology—artificial intelligence (AI)—and where it might take the economy.

Next, I will discuss the policy practice of forward guidance and the interaction between central banks and financial markets.

Next, I will outline some core principles that I believe should guide the implementation of monetary policy.

Finally, I will share my assessment of the current economic situation.

Prepare for the future policy environment

Against the backdrop of the unchanging Teton Mountains, we 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 were discussing "secular stagnation" and "global savings glut." A widely accepted view at the time was that excess capital would remain idle for a long, long time, as there simply wouldn’t be enough attractive investment opportunities. All the good ideas had already been invented. As a result, economic growth would be sluggish and slow.

However, times have indeed changed. We have reached a historical turning point.

A clear example is artificial intelligence—a term with an 80-year history that is now used to refer to the latest technological wave—whose rate of advancement has even surpassed the predictions of its most enthusiastic advocates just a few years ago.

The potential for significantly higher economic growth is rising. Increasing amounts of capital are flowing into a wide range of AI-related infrastructure. A kind of "super Moore's Law" appears to be unfolding. Meanwhile, economies of scale are also transforming the methods and speed of innovation.

Capital and labor have come together to create the large language models at the heart of AI. Users purchase tokens to gain access to these models. Reported annualized token sales from just two leading AI labs have already exceeded $100 billion, 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—or potentially a new factor of production—that will impact the economy and the implementation of monetary policy. This also opens up several major research directions:

Will the application of AI lead to a significant and sustained increase in overall economic productivity? If so, when will this occur?

Will the use of tokens complement or compete with labor? Will the next generation of AI models require higher capital intensity, or will the models themselves ultimately help us design solutions with lower capital requirements?

Other unresolved questions include what kind of market structure will ultimately emerge. It is currently unclear where capital returns will ultimately end up, or how long this process will take. In the early stages, how much of the economic surplus will flow to owners of scarce assets—AI labs, chip manufacturers, energy producers, and cloud service providers? Over time, how much value will ultimately reach businesses and consumers? What do these changes mean for workers? And what broad implications will they have for the Federal Reserve’s employment mandate?

Similarly, we currently do not know what the equilibrium price of tokens will be. Will different types and qualities of tokens emerge in the future, causing people to be willing to pay increasingly higher prices for access to the most advanced and best models? Will the price of tokens for older-generation models eventually fall to their marginal cost?

We will rely on a "Productivity and Employment Working Group" to delve deeper into these issues. I have recently had preliminary discussions with the leaders of this working group and four others, and their progress is encouraging.

However, it is important to note that the recommendations from these working groups will be submitted in the future and will not affect our current decisions under the existing policy environment. But I believe that investing in thoughtful planning today for future policy challenges will prepare us far more thoroughly.

Forward guidance and its alternatives

While these working groups are underway, I did not wait—I have already begun driving innovation at the Federal Reserve to better align it with its mandate. For example, I have already started reforming the form and function of what is known as the Federal Reserve Chair’s “forward guidance.” You may be aware that I have long been uneasy about announcing future policy decisions too early. I prefer to take a different path... I’ll explain why next.

Transparent communication about future policy decisions is not in itself a natural virtue. Communication must serve the Fed’s most important responsibility: getting monetary policy right.

During the global financial crisis, my colleagues and I at the time established forward guidance as a standard practice. At the time, it was essential, and we rolled it out with great fanfare. But like other legacies left by past crises, I believe this practice has now outlived its usefulness.

During normal times, the role of forward guidance should be limited and clearly bounded. Otherwise, it may create ambiguity under the guise of clarity. Excessive disclosure of policy discussions and excessive commitments about future policy decisions can mislead markets, businesses, and households. Moreover, I believe that when policymakers make near-commitments on interest rates throughout the economic cycle, we actually restrict our own freedom to make the right decisions when they are truly needed.

To get policy right, we must also properly manage the relationship between financial markets and the central bank. The Federal Reserve needs to receive clear market signals, and these signals should be filtered as little as possible… including the internal structure of markets… the levels and movements of asset prices across industries… the prices and trading volumes of U.S. Treasuries… the foreign exchange value of the dollar… the cost and availability of credit… and the prices of broad commodities.

These indicators, along with others, should help the Federal Reserve assess near-term economic activity and inflation prospects throughout the business cycle. They should also reveal the state of the broader financial environment... as well as risks and uncertainties in the financial cycle.

At the same time, market participants should also track real information across the economy. They should form their own judgments; develop their own expectations for output, employment, and inflation; and remain highly attentive to risks.

The Federal Reserve should remain humble, but never naive. The Fed plays a critical role in the economy and markets, and our policy tools wield significant power. We determine the path of short-term interest rates. As a result, market participants will always try to anticipate our next move. But we should not enable a mechanism where market participants base their next trade primarily on guessing the Fed’s intentions.

Economic literature has long described this distortion effect: it is known as the "hall-of-mirrors problem." If markets rely heavily on the Fed’s guidance, and the Fed in turn relies on market prices, we are all more likely to overlook new developments… more likely to be caught off guard when conditions suddenly shift… and more likely to make mistakes in policy-making.

Ironically, market participants may not be the ones bearing the greatest cost of the “hall of mirrors” problem. Those most severely harmed are likely people without financial assets. If the Federal Reserve misjudges inflation and the economy, who will face the worst consequences? Not high-net-worth individuals in financial markets. It is ordinary working Americans who will ultimately confront either persistently high inflation or suddenly unstable employment.

So, if forward guidance doesn’t apply during normal times, shouldn’t the new Fed chair at least commit to providing a clear reaction function? Of course, he should tell us where rates would go if data clearly comes in hotter or colder than expected.

I wish our understanding of the economy were truly precise enough to provide a mechanical, foolproof answer—such as strictly relying on a simple function similar to the Taylor rule. But our knowledge is far from reaching that level—at least not yet—and the most important factors in determining appropriate monetary policy themselves change over time.

Predicting the Fed's reaction function works better in theory than in reality, and better in the lab than in practice. I'm not the only one who has noticed this. For example, the forward guidance in 2021 likely delayed the Fed's policy response to high inflation later on.

During my tenure as chair, my colleagues and I will work to develop more reliable models and more robust rules to guide policy decisions. We will undertake this work with the understanding that accurately predicting the economy remains an aspiration. Given how rapidly geopolitics, global supply chains, and technology are changing, it is prudent to remain humble about what we can and cannot know.

In the same spirit, we should fully consider a variety of perspectives on any issues that could influence the Federal Reserve’s monetary policy decisions. If our goal is to make optimal decisions, we should not exclude differing views on the economy.

So, how can we chart a better path for policy? In the following remarks, I will share some core principles that guide my thinking on the appropriate implementation of monetary policy... and then I will follow through on my promise to discuss my assessment of the economy.

Core Principles

Now let's discuss the principles...

First, I’ve noticed that in our field, people often mistake yesterday’s news for what is currently happening. The real challenge is distinguishing between the two. In other words, we must continuously test 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 are what matter most. The Federal Reserve is an institution that makes decisions. We must make choices amid uncertainty, so the data we rely on must be as relevant, timely, accurate, and directly actionable for decision-making as possible.

Second, the Federal Reserve acts to ensure that total demand in the economy broadly aligns with total supply. However, what we can directly observe is only economic activity itself. We can never directly see what is truly happening on the supply side—we can only infer it. Therefore, assessments of the balance between current and future total supply and total demand are inherently imprecise.

Third, there must be no misunderstanding: the Federal Reserve’s 2% price stability target, as measured by the Personal Consumption Expenditures (PCE) price index, is a firm and fixed goal. We must also be equally clear about another aspect of this target: price stability does not occur automatically, and inflation does not necessarily exhibit mean reversion. Achieving price stability is the Federal Reserve’s responsibility.

Fourth, the Federal Reserve is also responsible for achieving maximum employment. Meeting both goals of its dual mandate over the medium term is not a “either-or” issue. 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 policy tool for achieving the dual mandate. Unconventional policies adopted to stimulate economic activity may be appropriate during genuine crises, but should be used sparingly, if at all, in other circumstances.

Sixth, money matters. This view is not popular today, but I believe there is certainly an important relationship between money and monetary policy. We should pay attention to money created by central banks, as well as money generated by banks and the financial system. Indeed, financial innovation and other factors have changed the mechanisms linking the monetary base, velocity of money, and the broader economy. But this is no reason to ignore the fact that money ultimately affects financial conditions and prices.

Ultimately, a quieter, more purposeful Federal Reserve will be better positioned to achieve its goals. Whether we have fulfilled our duties can be held accountable—and that is the only true measure of our credibility. As General Chuck Yeager once said: “When it comes time to deliver, there are only reasons or results.”

Current economic situation

So, under these principles, how do I assess today’s economy? What is truly happening outside my window?

Most of you may have seen from the July meeting minutes the FOMC’s unanimous assessment: the labor market is stable, economic output is solid, but inflation remains too high. Myself and the vast majority of my colleagues believe it is wiser to wait for additional new information between meetings—particularly given potential new developments in supply chains, investment flows, and geopolitics—before determining whether adjusting monetary policy is appropriate. At the same time, we collectively affirmed that we are prepared to act as needed based on evolving conditions.

Personally, I was deeply impressed by the overall performance of the U.S. economy today, and it appears to have strengthened. One indicator of an economy’s strength is how well it withstands shocks—and from this perspective, both the real economy’s “Main Street” and the financial markets’ “Wall Street” have demonstrated remarkable resilience.

Here are a few observations:

Corporate capital expenditures—the "seed grain" for future economic growth—are rising rapidly. The four-quarter increase in investment in equipment and intangible assets is around 9%, the highest growth rate since 2021. More than half of this year’s capital expenditure growth is likely attributable to AI-related infrastructure construction.

For S&P 500 companies, profits have grown by more than 20% over the past year. Corporate profit margins are relatively high compared to historical levels. Overall market volatility remains low. We are closely monitoring market internals, observing performance across different sectors.

Market expectations for capital expenditures and corporate earnings growth are currently very high. I will continue to monitor changes in the pace of their growth—the so-called “second derivative.” The resulting downstream impacts—including on asset prices, corporate confidence, consumer income, and spending—are equally important.

Credit spreads for corporate bonds and leveraged loans are near the lower end of their historical ranges, and issuance in these markets has been quite strong this year. Looking beyond fixed income to the banking sector, the July Senior Loan Officer Opinion Survey indicates that banks report current credit standards for commercial and industrial loans are at a relatively loose end of the historical spectrum. This also helps explain why such loans have grown this year. Credit and loan markets show little sign of being constrained by monetary policy.

Certain industries—such as housing and agriculture—are indeed under pressure. But overall, I would find it difficult to characterize the broader financial environment as "restrictive."

Despite various shocks, actual consumer spending has remained healthy, growing by more than 2% over the past four quarters. When combined with the strong investment we have observed, private domestic final purchase (PDFP) has also increased. So far this year, PDFP has grown at a rate close to 3%. This metric typically carries stronger economic signals than GDP, and the trend it is currently showing is likewise positive.

On the employment side of the Federal Reserve’s dual mandate, the U.S. is currently performing well. The labor market remains quite stable. The unemployment rate is currently at 4.1%, which remains low by historical standards and has seen little significant change over the past few years. The number of initial claims for unemployment insurance, calculated as a four-week moving average—a well-tested and robust real-time indicator—is currently near multi-decade lows.

In my view, the current labor market has relatively low turnover, partly because, after the pandemic, there was a large-scale realignment between employers and employees.

When labor supply is nearly stagnant, the number of new jobs added each month will naturally be low. There will always be some segments of the labor market worth monitoring—such as recent graduates. But overall, those who want to work are still generally able to keep their jobs or find new ones. They may naturally worry about potential disruptions to the labor market in the future, but so far, I believe the U.S. labor market is consistent with full employment.

But on the price stability side of our dual mandate, the data is more concerning. The Federal Reserve’s preferred inflation measure—the year-over-year change in the PCE price index—is currently at 3.7%, while the annualized change over the past six months stands at 4.1%. Comparable metrics for the Consumer Price Index (CPI) are also elevated, and core inflation measures for both PCE and CPI remain high. None of these indicators are perfect, but they all tell a similar story: inflation remains above our 2% target. Therefore, the Fed’s primary focus right now should be on prices.

The task of policymakers is to identify underlying trend inflation—that is, the broad-based price changes across the economy after excluding various special and idiosyncratic factors. We need to determine whether underlying inflation is rising, falling, or stagnating. We seek not only to understand the direction of its change but also the pace at which it is changing. Each of these broad inflation measures has declined significantly compared to its peak in 2022. However, the progress made over the past two years has been quite limited.

Moreover, although this summer’s PCE and CPI data came in better than expected, these figures have not led me to believe that the underlying inflation trend has improved meaningfully.

Data shows that wage growth is currently also moderate. However, wage growth has long not proven to be a reliable indicator for predicting future inflation when tracking underlying inflation.

To assess potential inflation, I find it helpful to break down the 199 individual components of the PCE price index. Over the past 12 months, 54% of the items in the PCE basket have seen price increases exceeding 3%. This percentage is significantly lower than the post-pandemic peak of about 77%, but still well above the 32% average seen over the 20 years prior to the pandemic.

Looking only at the past six months, the conclusion is similar: 49% of the items in the PCE basket experienced an annualized price increase exceeding 3%. Similarly, this is clearly lower than the post-pandemic peak, but still remains at a relatively high level.

The recent rise in overall commodity prices is also worth noting. We need to determine whether these current trends indicate an upward risk of inflation.

Additionally, it is equally important whether the inflation data that has persisted for over the past five years has become embedded in people’s expectations. The good news is that medium-term inflation expectations remain broadly stable. Inflation compensation indicators in the swaps market also convey a similar and strong signal.

Especially considering recent developments, the market price still reflects confidence that we can achieve price stability—both a testament to the Federal Reserve’s institutional credibility and in line with the Fed’s finest traditions. And I can assure you all... the market is right.

Historically, market-based inflation expectations have shown a characteristic: they often remain remarkably resilient and firmly anchored until they lose stability. These expectations do not change easily, and currently, they remain well-anchored. But we must closely monitor them. Ensuring that inflation expectations do not become unanchored is the Federal Reserve’s responsibility.

There is a signal that no one should ignore: the sustained and elevated inflation over the past 65 months is clearly the responsibility of central banks—and this is precisely where the responsibility should lie.

My standard is: We must be confident that underlying inflation is clearly and sufficiently rapidly moving toward our goal. Otherwise, we still have work to do. That is our work… our mission… and the responsibility we must fulfill.

Conclusion

Today, standing here, I am committing to a discipline, not a specific policy decision.

In this significant era, my colleagues at the Federal Reserve and I are by no means the first to hold these views. We are committed to valuing this moment and performing our work to the highest standards possible.

We take our responsibilities seriously with humility and determined resolve. Much depends on the choices we make. Sound monetary policy can help families and businesses thrive. If effectively implemented, monetary policy can expand and deepen the drivers of U.S. economic growth... while helping to solidify America’s leadership in the world. I also recognize that our nation needs us to think carefully and act wisely.

It is a great honor to serve the Federal Reserve again. I am truly grateful for the encouragement and valuable advice from my colleagues... and for the support from many of you here today... I also thank everyone for your patient listening this morning. Thank you.

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