Editor's Note: At 10 PM Beijing time on August 28, Federal Reserve Chairman Kevin Warsh delivered a speech at the Jackson Hole Global Central Bank Symposium, which is also his first speech at this important central bank meeting since taking office as Federal Reserve Chairman.

In his speech, Kevin Warsh stated that the "forward guidance" tool during unconventional times has completed its mission in normal economic environments and should be retired. Monetary policy needs to return to data dependence and decision discipline.

Facing the variable of artificial intelligence in this era, he admitted that its profound impacts on productivity, the labor market, and the structure of capital returns remain unknown, and the Federal Reserve needs to maintain cautious observation. At the same time, he clearly presented seven guiding principles for policy implementation: anchoring the 2% inflation target, balancing employment missions, using short-term interest rates as the main tool, focusing on the quantity of money, maintaining restraint and purposefulness in communication. These principles sketch out a governance approach that returns to orthodoxy and avoids policy overload.

In his assessment of the situation, he believes the labor market is broadly consistent with full employment, but inflation remains significantly above target—PCE year-on-year is 3.7%, with over half of the subcomponents rising more than 3%. He promised not to pre-set a policy path but clearly stated that unless he is confident inflation is moving toward the target at a clear rate, the Federal Reserve "has work to do." The text conveys a stance where discipline precedes specific decisions: making humble judgments in uncertainty while being steadfast in the face of responsibility. Monetary policy stands at a new crossroads, and this Chairman chooses to win market trust through stability rather than recklessness, through transparency rather than commitment.

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

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Thank you, everyone. I'm very happy to be here again and to see so many familiar faces. I've been looking forward to this weekend—where better to commemorate my 100th day as Chairman of the Federal Reserve than here? This warm hospitality is to be credited to Jeff Schmid, President of the Federal Reserve Bank of Kansas City, and his colleagues. Jeff, thank you on behalf of all of you.

Years ago, I learned that there are two distinctly different hiking trails around Jackson Hole. I can summarize my hiking experiences with former Federal Reserve Vice Chairman Don Kohn in two words: **I survived.** Those grueling marathon-like "death marches" revealed a Don Kohn I was completely unprepared to face.

There is another way to hike—I would associate it with my old colleague, former Federal Reserve Chairman Ben Bernanke. Hiking with Ben is much more leisurely, a casual stroll along the winding paths of the Rockefeller Preserve.

So, before setting off, do a "health check" and ask yourself: "Is today a Kohn day, or a Bernanke day?"

The theme of this conference is innovation. I am confident that the public and the markets—with collective wisdom—understand that the Federal Reserve's innovation in approach to policy implementation will help achieve price stability while ensuring full employment.

Let me briefly outline the content of my speech 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 universal technology—artificial intelligence (AI)—and where it might take the economy. Next, I will talk about the policy practice of forward guidance and the interaction between central banks and financial markets. Then, I will present a few key principles that I believe should guide monetary policy implementation. Finally, I will share my assessment of the current economic situation.

Preparing for Future Policy Shifts

Against the backdrop of the enduring Teton Mountains, we come here to examine a dynamic economic landscape that is anything but static. Just a short time ago—on the eve of the 2008 crisis and in the decade that followed—economists and policymakers were discussing "secular stagnation" and "global savings glut." At that time, a widely held view was that vast amounts of capital would remain idle for a long time due to a lack of compelling investment opportunities. It seemed that all the good ideas had already been invented.

Thus, economic growth was expected to be sluggish and slow. Well, times have changed dramatically. We have reached a turning point in history.

The most obvious example is the development of artificial intelligence—this term has been used for 80 years to describe today's latest generation of technology—whose growth rate surpasses the predictions of tech evangelists from just a few years ago. The potential for significantly higher economic growth is on the rise. A growing pool of capital is flooding into various AI-related infrastructures. Some phenomenon resembling a **"super Moore's Law"** appears to be occurring. The scale expansion rules are changing, affecting both the manner and speed of innovation.

Capital and labor combine to create large language models that are core to AI. Users purchase tokens to gain access to these models.

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

We recognize that AI is a new variable—even 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 drive significant and sustained improvements in productivity across the entire economy? If so, when will this improvement occur? Will the use of tokens complement the labor force or create competition? Will the next-generation AI models require a higher capital intensity, or can the models themselves help design solutions that require less capital input?

Another unresolved question pertains to the resultant market structure. We still do not know where capital returns will ultimately land, nor how long this process will take. In the early stages, how much surplus value will flow to the owners of scarce assets—AI labs, chip manufacturers, energy producers, and cloud service providers? Over time, how much value will flow to businesses and consumers? What broad impacts will this have on workers and the Federal Reserve's employment objectives?

Likewise, we do not know what the equilibrium price of tokens is. Will there be different types of tokens such that people are willing to pay increasingly more to gain access to cutting-edge, premium models? Will the token prices for older models eventually drop to marginal cost levels?

However, it is important to clarify that their suggestions will be raised later, and will not influence our decisions under the current policy landscape. But I believe that today's intellectual investment will better prepare us for future policy challenges.

Forward Guidance and Its Alternatives

While our working group has started its tasks, I did not wait to introduce innovations at the Federal Reserve to adapt to future needs.

For example, I have begun to change the form and function of the so-called "forward guidance" of the Federal Reserve Chairman. As you may know, I have long been uncomfortable with prematurely announcing future policy decisions.

I prefer another path… I will explain why below.

Transparency in communicating future policy decisions is not a virtue in itself. Communication must serve the Federal Reserve's most critical responsibility: to conduct monetary policy effectively.

Forward guidance, as a conventional policy tool, was adopted by me and my colleagues during the global financial crisis. It was crucial at that time, and we launched this tool very publicly. However, like other legacies left by past crises, I believe that forward guidance has passed its usefulness. In normal times, the role of forward guidance should be limited and remain within clearly defined boundaries.

Otherwise, it can create confusion under the guise of "clarity."

Over-disclosure of the policy discussion process, as well as overcommitting to future decisions, can mislead markets, businesses, and households. And I believe that when policymakers make some sort of tacit commitment on interest rates throughout the policy cycle, we are in fact limiting our freedom to make good judgments when we need to make decisions.

To carry out policy effectively, we need to properly manage the relationship between financial markets and central banks. The Federal Reserve needs clear market signals, which should be as unfiltered as possible, including internal market indicators, levels and changes in asset prices across different markets and industries, U.S. Treasury prices and trading volumes, the dollar's foreign exchange value, credit costs and availability, as well as the prices of a broad range of commodities. These indicators, along with others, should help the Federal Reserve assess short-term economic activity and inflation prospects across the overall economic cycle.

The Federal Reserve should remain humble but never naive. The Federal Reserve plays a critical role in the economy and markets. Our policy tools are powerful. We set the path for short-term interest rates. Market participants will always try to predict our next moves. However, we should not indulge a mechanism where market participants primarily rely on the Federal Reserve to determine their next trade.

The economic literature has long described the distorting effects of such a mechanism, known as the so-called "hall-of-mirrors problem." If markets heavily depend on the Federal Reserve's guidance and the Federal Reserve relies on market prices, we all are more likely to miss new developments, be caught off guard when circumstances pivot, and make mistakes in the policymaking process.

Ironically, market participants may not bear the greatest costs of the "hall-of-mirrors problem." The most severe harm is likely to fall on those without financial assets. If the Federal Reserve misjudges inflation and misjudges the economy, who will suffer the most? Not the winners in financial markets. Those who really need to face high inflation or suddenly less stable jobs are hardworking Americans.

So, if forward guidance is not suitable for normal times, should the new Federal Reserve Chair at least commit to a clear reaction function? For example, if the data shows strong or weak performance, should he inform us how interest rates will change? I would hope our understanding of the economy could be precise enough to provide a mechanical, repeatedly validated answer—such as being strictly reliant on a simple function like the Taylor Rule. But our knowledge has not reached that level—at least not yet. Moreover, the most crucial factors for the correct implementation of monetary policy will change over time.

Demonstrating the Federal Reserve's reaction function through forecasting is theoretically more effective than in practice, more effective in the laboratory than in the real world. It is not only I who have noticed, for instance, that the forward guidance in 2021 likely slowed the Federal Reserve's policy response to high inflation. During my tenure as Chair, my colleagues and I will strive to build more reliable models and more robust rules to guide policy decisions.

We will do this while clearly recognizing that the accuracy of economic predictions remains a wish. Geopolitics, global supply chains, and technology are changing so rapidly that it is prudent to maintain modest humility about what we can know and what we cannot know. In that same spirit, we should fully listen to diverse perspectives on any issue that could affect monetary policy decisions. If the goal is to achieve the best decisions, we should not exclude differing views on the state of the economy.

So, how can we find a better path for policymaking?

In the upcoming part of my speech, I will share some key principles that guide my thinking on how to appropriately implement monetary policy…

and then provide my committed assessment of the economic situation.

Key Principles

Let’s talk about these principles.

First, I note that in this work, yesterday's news can easily be mistaken for what is happening currently. The challenge is to distinguish between the two. In other words, we must examine reality and ensure that we are not formulating forward-looking policy based on outdated or inaccurate data. We should also not rely on isolated data points. Trends are the most important. The Federal Reserve is a decision-making body. We make choices amid uncertainty; therefore, the data we base our decisions on must be as relevant, timely, accurate, and actionable as possible.

Second, the purpose of the Federal Reserve's actions is to ensure that the overall demand in the economy broadly aligns with the total supply. However, the only economic activity we can directly observe is what's happening. We can never see directly what’s happening on the supply side; we can only infer it. Therefore, assessing the balance between total supply and total demand both now and in the future is itself imprecise.

Third, it must be clear, with no room for misunderstanding: the 2% price stability target measured by the personal consumption expenditures (PCE) price index is a firm and fixed goal. Likewise, we must clarify another aspect of the goal: price stability will not happen automatically, and inflation will not necessarily return on its own. Achieving price stability is the responsibility of the Federal Reserve.

Fourth, the Federal Reserve is also responsible for achieving maximum employment. In the medium term, fulfilling the dual mandate is not a either-or choice. I do not believe the dual mandate of the Federal Reserve conflicts with each other. After all, high inflation itself can severely undermine 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 applicable during true crises but should be used cautiously otherwise, and if possible, even avoided.

Sixth, money matters. It may not be fashionable to discuss this today, but my point is: there is an important relationship between money and monetary policy. We should focus on the money created by central banks and the money from the banking system and financial system. Admittedly, financial innovations and other factors have changed the transmission mechanisms between the monetary base, the velocity of money, and the broader economy. But this is hardly a reason to ignore how money ultimately influences financial conditions and prices.

Finally, a quieter and more purpose-driven Federal Reserve is better equipped to achieve its objectives. We can also be held accountable by whether we fulfilled our responsibilities—that is the only true measure of our credibility. To borrow the words of U.S. Air Force General Chuck Yeager: "In moments of truth, there are either reasons or results."

The Current Economic Situation

Now, based on these principles, how do I view today's economy? What has been happening outside? You may have seen in the minutes from the July meeting that the Federal Open Market Committee (FOMC) has a consensus view: the labor market remains stable, and output is performing well. But inflation is still too high.

I and most colleagues believe it is wiser to wait for new information between the two meetings—especially considering potential developments with supply chains, investment flows, and geopolitics—before deciding whether a change in interest rate policy is necessary. We also collectively expressed a willingness to take action as needed. For my part, I am impressed with the overall performance of the economy today. The economy 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 shown uncommon resilience. Here are a few observations I’d like to share.

Business capital expenditures—essentially the "seed corn" for future economic growth—are growing rapidly. The quarterly change rate of investments in equipment and intangible assets is about 9%, the highest growth rate since 2021. More than half of this year’s capital expenditure growth is likely attributable to AI-related construction. For S&P 500 firms, profit growth exceeded 20% over the past year. Profit margins are relatively high compared to historical levels. The overall stock market exhibits low volatility. We are closely monitoring conditions within the market, observing performance across industries. The market has fairly high expectations for capital expenditures and corporate profit growth.

I will continue to watch the changes in their growth rates, specifically the second derivatives of growth rates. The subsequent impacts on asset prices, business confidence, consumer income, and consumer spending are also critical to assess. The credit spreads of corporate bonds and leveraged loans are near the low end of historical ranges; issuance in these markets has also been robust this year. If we shift our focus from the fixed-income market to banking, in the July Senior Loan Officer Opinion Survey, banks told us that the standards for commercial and industrial loans are on the looser side of historical ranges, which helps explain the growth of these loans this year.

The credit and loan markets show almost no signs of policy tightening, though certain sectors—like housing and agriculture—are under pressure. Overall, it is difficult for me to agree that broad financial conditions are significantly restrictive. Despite facing various shocks, real consumer spending remains healthy, growing over 2% in the past four quarters. Year-to-date, PDFP growth is close to 3%. This indicator typically contains more effective signals than Gross Domestic Product (GDP), and the trend here is similarly positive.

In terms of employment within the Federal Reserve's dual mandate, our nation is performing well. The labor market is fairly stable. The current 4.1% unemployment rate is still low by historical standards and has not changed much for several years. The number of new jobless claims averaged over four weeks—a robust real-time indicator—approaches the lowest level in decades. In my view, the current low turnover rate in the labor market partly stems from the large-scale employer-employee re-matching that occurred in the post-pandemic period. When labor supply has nearly stopped growing, monthly net job additions will naturally be at lower levels. However, there are indeed worrisome areas within the labor market—for example, among recent graduates. But overall, those who want to work largely seem to be keeping their jobs or finding work.

They may be concerned about potential future disruptions in the labor market, but at this point, I believe: the labor market is consistent with full employment. However, the situation regarding price stability in our dual mandate is more concerning. The Federal Reserve’s preferred inflation measure—the year-on-year increase in the PCE price index—is currently 3.7%, while the six-month change rate stands at 4.1%. Corresponding measures from the Consumer Price Index (CPI) are similarly elevated, as are core inflation measures from PCE and CPI. None of these indicators are perfect, but they all tell a similar story:

Inflation remains above our 2% target. Therefore, the Federal Reserve's primary focus should currently be on prices. The task of policymakers is to capture potential trending inflation—that is, the general changes in prices throughout the economy, excluding the influences of special factors. We want to ascertain whether potential inflation is rising, falling, or stagnating. We hope not only to understand the direction of change, but also the speed of change. All these broader inflation indicators have significantly declined from their peaks in 2022.

To assess potential inflation, I find it very helpful to break down the 199 components of the PCE price index. Over the past 12 months, 54% of the prices of goods and services in the PCE basket have risen more than 3%. This proportion is much lower than the post-pandemic peak—around 77%—but still significantly higher than the 32% average during the 20 years prior to the pandemic. If we only observe the past six months, a similar conclusion arises: of the goods and services in the PCE basket, 49% have experienced annualized price increases exceeding 3%. Again, this proportion is much lower than the post-pandemic peak, but is still at a fairly high level.

The recent broad rise in commodity prices is also notable. We need to determine whether these trends indicate that inflation faces upward risks. Equally important is to assess whether inflation over the last five years has already seeped into inflation expectations. The good news is that medium-term inflation expectation indicators appear to be fairly stable overall. The inflation compensation indicators in the swap market convey strong and consistent messages. Particularly considering recent developments, market prices still indicate confidence that the Federal Reserve can achieve price stability, which affirms the institution of the Federal Reserve and is consistent with its best traditions.

I assure you all… they are right.

From an economic history perspective, a feature of market-measured inflation expectations is that they often appear strong and stable until they lose their anchor. These expectations are not easily swayed, and for now they remain firmly anchored. But we must closely monitor them. Ensuring inflation expectations do not become unanchored is the responsibility of the Federal Reserve. One signal that no one can ignore is: the responsibility for persistently high inflation for 65 months clearly lies with the central bank. Moreover, this responsibility belongs to the central bank.

My standard is: we must be confident that potential inflation is aligning with our targets, and at a clear and sufficiently rapid pace. Otherwise, we still have work to do. This is our job… our mission… and the responsibility we must bear.

Conclusion

Standing here today, I pledge a discipline, not a specific decision. My colleagues and I at the Federal Reserve are not the first to hold these positions at such a critical juncture. We are determined to cherish time, seize opportunities, and do our utmost to fulfill our responsibilities. We approach our duties with humility and resolve. Much depends on the choices we make. Robust monetary policy can help households and businesses thrive. When monetary policy is effectively implemented, it can amplify and deepen the momentum of economic development… and help solidify America's leadership in the world.

I know that our nation needs us to think deeply, judge cautiously, and act wisely. It is a supreme honor to serve again at the Federal Reserve. I sincerely thank my colleagues… and many of you here for your encouragement and good advice. Thank you all for your attention this morning.

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