Inflation on the Front Burner

Fed Chair Warsh’s speech at Jackson Hole on Friday had a clear message: the Fed is not declaring victory on inflation, does not view the economy as broadly weak, and will not pre-announce its next move. If upcoming data do not demonstrate faster, durable progress toward 2% inflation, Warsh’s framework points toward a rate increase rather than a rate cut.

The Warsh Perspective

Warsh’s message at Jackson Hole was hawkish in substance but deliberately noncommittal on the next rate decision in September. He portrays the U.S. economy as strong enough to withstand a continued focus on inflation, sees financial conditions as relatively easy rather than restrictive, and argues that inflation remains too broad and too far above 2% to declare victory.

Warsh reaffirmed that the 2% PCE inflation target is “firm” and “fixed,” stated that the dual mandate (maximum employment and stable prices) is not inherently a tradeoff because high inflation damages prosperity, and emphasized short-term rates as the Fed’s main tool. He said unconventional stimulus—such as quantitative easing (QE)—should be reserved for genuine crises, and argued that money and credit creation deserve more attention in policy analysis.

Warsh argues that AI may be a major new factor of production, potentially lifting productivity, investment, and long-run economic growth. He notes rapid growth in AI infrastructure spending and token sales, adding that the Fed is studying AI’s implications for productivity, labor, capital investment, market structure, and the distribution of gains between firms, workers, and consumers. He emphasized that these longer-term studies will not dictate current monetary policy decisions; instead, they are intended to prepare the Fed for future economic changes.

The Desire for a Quieter Fed

Warsh was again strongly critical of routine forward rate guidance from the Fed, which has been standard practice since the Great Financial Crisis of 2008. He noted that while it was necessary during the 2008 financial crisis, it has persisted for too long.

His concern is that overly explicit guidance can:

  • Encourage markets to trade the Fed rather than independently assess the economy.
  • Lock policymakers into quasi-commitments that limit their ability to respond to changing conditions.
  • Create a “hall of mirrors,” where markets rely on Fed guidance and the Fed then relies on market prices shaped by that guidance.
  • Ultimately hurt workers and households if policy mistakes result in high inflation or avoidable job losses.

He believes the economy is too uncertain and evolving too quickly for policymakers to commit credibly to a formulaic interest-rate path.

The Fed vs. The Treasury

Warsh’s comments are difficult to reconcile with Trump’s continuing calls for lower rates and Treasury Secretary Bessent’s actions last week to lower long-term interest rates. While Trump has continued to defend Warsh personally while criticizing other Fed officials who support higher rates, this speech appears to create the potential for a test of political loyalty versus institutional credibility if the Fed should raise rates soon.

The potential Bessent conflict is less about the overnight policy rate and more about the boundary between monetary and fiscal policy. Warsh did not name Bessent in his speech, but he said the Fed needs market signals that are as “unfiltered as possible.” This directly conflicts with the Treasury’s actions to use buybacks in an effort to artificially push long-term rates lower.

Warsh’s emphasis matters because persistent official efforts to suppress long-term yields can obscure the market’s view of inflation, fiscal risk, and required returns on government debt—exactly the signals a central bank needs when deciding whether policy is restrictive enough.

Policy Takeaways

  • Warsh said the Fed’s “predominant focus right now should be on prices.” He cited PCE inflation of 3.7% over 12 months and 4.1% over six months, arguing that the summer’s better-than-expected readings do not yet show a meaningful improvement in underlying inflation.
  • He set a high bar for easier policy: the Fed must be confident that underlying inflation is moving toward 2% “clearly and at sufficient speed”; otherwise, “we have work to do.” That framing leaves the door open to maintaining—or potentially increasing—restrictiveness if inflation fails to improve.
  • He avoided giving a mechanical “reaction function” or conditional rate path. In other words, he did not state what a particular inflation or employment outcome would automatically mean for rates.

Quote of the week: “It costs a lot of money to look this cheap.” – Dolly Parton, RIP

Have a great week!

 

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The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that no such statements are guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

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By: Adam