Federal Reserve Chairman Kevin Warsh told the Kansas City Fed’s economic policy symposium on Aug. 28 that inflation remains too high and that price stability should be the Fed’s predominant focus.
Warsh titled the speech “In Our Time.” He said financial innovation, especially artificial intelligence, is changing the economy’s supply side even as the central bank still has work to do on prices.
“Innovation is the conference theme, and I believe that the public and the markets—in their collective wisdom—understand that innovations in the conduct of policy at the Fed will help deliver price stability alongside full employment,” he said.
He described the moment as a hinge point. Leading AI labs now generate more than $100 billion in annualized token sales, up 500 percent from a year earlier. He announced a Fed task force on productivity and jobs to study how AI may affect output, labor demand and returns on capital. He said the group’s work would prepare the institution for future challenges and would not dictate immediate policy.
Warsh was sharper on communications. He argued that crisis-era forward guidance has lasted too long in normal times and can distort market signals. “Transparency in communications about future policy decisions is not a virtue unto itself. Communications must be in service to the Fed’s paramount responsibility: getting monetary policy right.”
He warned of a hall-of-mirrors problem if markets lean too heavily on Fed forecasts and the Fed then leans on those same market prices. “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… and more likely to commit errors in policymaking.”
His principles were direct. Use current data rather than stale news. Treat 2 percent PCE inflation as a firm target. Keep short-term interest rates as the main tool. Watch money created by the Fed and by the broader financial system. Prefer quieter, purposeful communication.
“The Fed’s price-stability objective of 2 percent, as measured by the personal consumption expenditures (PCE) price index, is a firm, fixed target,” he said. “Price stability is not self-executing, nor is inflation necessarily mean-reverting. It is the Fed’s job to deliver stable prices.”
On the current economy, Warsh said labor markets look stable and output remains solid. Unemployment is 4.1 percent. Real consumer spending is up more than 2 percent, and private domestic final purchases are up nearly 3 percent. Business capital spending has risen 9 percent over four quarters, with more than half of that tied to AI. Credit conditions remain easy.
Inflation is the problem. The 12-month PCE rate is 3.7 percent, and the six-month pace is 4.1 percent. Fifty-four percent of PCE components are still rising more than 3 percent a year.
“Inflation is running above our 2 percent target. So the Fed’s predominant focus right now should be on prices,” he said. “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do.”
He placed responsibility at the Fed. “There is one signal nobody can miss: The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank. And that is where it belongs.”
Warsh said he was committed to a discipline rather than a single near-term decision. “Sound monetary policy helps households and businesses to prosper. When carried out effectively, it broadens and deepens the momentum of our economy… and helps to secure America’s leadership in the world.”
