Warsh's First Jackson Hole Speech Was a Doctrine, Not a Signal

Kevin Warsh used his first Jackson Hole keynote as Federal Reserve chairman to describe how he thinks monetary policy should be conducted rather than to announce what the Federal Open Market Committee will do at its next meeting. The remarks, delivered on August 28 and titled "In Our Time," set out six principles, a critique of forward guidance, and an assessment of inflation that was blunter than the framing usually used from that podium.

The six principles

1. Data must be usable. "The Fed is a decisionmaking agency. We make choices amid uncertainty, and the data upon which we draw must be as relevant, contemporaneous, accurate, and actionable as possible."
2. Supply is inferred, not observed. "All we observe directly is activity. We never see, and can only infer, what's really happening on the supply side."
3. The target is fixed. "The Fed's price-stability objective of 2 percent, as measured by the personal consumption expenditures (PCE) price index, is a firm, fixed target."
4. The two mandates are not a trade-off. "Achieving both sides of our mandate over the medium term is not an either/or proposition."
5. Rates come first. "Short-term interest rates are the predominant tool to achieve the dual mandate. Unconventional policies ... should otherwise be used sparingly."
6. Money is not irrelevant. "My view is that money has something important to do with monetary policy. We should pay attention to money created by the central bank."

The case against talking about the future

The most operationally significant part of the speech was the treatment of forward guidance, the practice of telling markets in advance what the committee expects to do. Warsh's objection is that guidance is not free. It commits the committee to a path it may later want to leave, and it contaminates the market prices the committee uses as evidence.

Oversharing policy deliberations and overcommitting to future decisions can lead markets, businesses, and households astray.

If markets rely materially on the Fed's guidance and the Fed relies on market prices, we are all more likely to be blinded to new developments.

That is a circularity argument. If the yield curve mostly reflects what the Fed has said it will do, then reading the yield curve tells the Fed what the Fed already said. Both parties can then be surprised together.

The inflation numbers he chose

• PCE inflation over twelve months: 3.7 percent.
• PCE inflation over the most recent six months: 4.1 percent — that is, the recent run rate is faster than the annual figure.
• Breadth: 54 percent of the goods and services in the PCE basket showed price increases above 3 percent over twelve months, against a pre-pandemic baseline he put at 32 percent.
• Jobless rate: 4.1 percent, which he called low by historical standards, with unemployment claims near 40-year lows.

The six-month figure running above the twelve-month figure is the part that carries the argument. It says the more recent data are not pulling the average down. The breadth measure does similar work: an inflation rate driven by a handful of categories can be dismissed as relative-price noise, and one where a majority of categories are rising above 3 percent cannot.

The line the market heard

We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do.

HousingWire reported that Warsh also said underlying inflation trends have not meaningfully improved toward the 2 percent target, and that he described the market-based measures of inflation expectations that central bankers lean on as things that "tend to look strong and durable until they don't."

On the economy itself he was not gloomy. He pointed to growth in equipment and intangibles investment of around 9 percent, the strongest since 2021, real consumer spending up more than 2 percent over four quarters, and S&P 500 corporate profits up about 20 percent year over year with elevated margins.

Why it matters

A chairman who says he will not pre-commit is telling markets that meetings will carry more information and speeches will carry less. That raises the weight of each data release between now and the September 15-16 meeting, because there is less official commentary standing between the number and the decision.