Kevin Warsh tries being a normal central banker

For around 20 years central bankers have made a virtue of saying more and more about where they think interest rates may be headed. Since becoming chairman of the Federal Reserve in May, Kevin Warsh has made a point of keeping his mouth shut. But on August 28th, at the Fed’s annual conference at Jackson Hole, Wyoming, surrounded by the Teton mountains, Mr Warsh had little choice but to talk.

For much of his speech, the Sphinx of the Fed trod familiar ground. Mr Warsh began with what he called a “trail map” for his remarks—careful, he joked, not to call it “forward guidance”, the sort of firm statements about the direction of interest rates that he especially dislikes. He explained his fascination with artificial intelligence through a laundry list of questions the Fed is pondering (sample: “Will token usage be complementary or competitive to labour?”). And he spent a good deal of time on his favourite bugbear, arguing that forward guidance was a legacy of the global financial crisis of 2007-09 which had “overstayed its welcome”. The Fed, he said, should be humble and avoid overcommitting itself to future decisions. An explicit reaction function “works better in theory than in practice, better in the lab than in the field”.

Yet for all his suspicion of reaction functions, Mr Warsh proceeded to reveal quite a bit of his own. For the first time as chairman, he walked his audience through the latest data and offered a hint about how he assessed it. His conclusion was distinctly hawkish. The economy, he said, appeared to have strengthened: both “Main Street and Wall Street have been remarkably resilient.” Business investment was rising rapidly, while credit and loan markets showed few signs of being restrained by policy. He would be “hard pressed to describe broad financial conditions as restrictive”.

Mr Warsh then addressed the Fed’s dual mandate to maintain both price stability (defined by an inflation target of 2%) and full employment. Weak monthly job gains, he argued, mostly reflected slower labour-force growth, and the labour market remained “consistent with full employment”. His chief concern was instead with inflation. The underlying trend, he said, had not improved meaningfully. Until it was moving clearly and quickly enough towards the Fed’s objective, “we have work to do.” Don’t call it a reaction function and certainly don’t call it forward guidance, but Mr Warsh offered a firm steer that the Fed’s next move on interest rates will be upwards.

The clarity about how Mr Warsh reads the data came as a relief to markets. Two-year Treasury yields jumped by about a tenth of a percentage point in response to the hawkish speech. Ten-year yields were close to flat (see chart 1). That is an encouraging combination: investors marked up the expected path of near-term interest rates without demanding more compensation for holding longer-dated debt. They seem to like Mr Warsh’s return to central-banking business as usual.

The Jackson Hole speech came at an awkward moment for Mr Warsh. His credibility took a battering at a shaky press conference in July (see chart 2), where he sounded a bit more like a rate-cutting dove and was much more stubborn in refusing to share much of his thinking. He brushed aside a question about whether he would raise rates to cool prices. He mused that, after next January, inflation measured by the personal-consumption-expenditures (PCE) price might no longer be the Fed’s preferred gauge.

And his case for saying less was itself muddled: markets, he argued, should learn to “play the ball, not the referee”, allowing the Fed to receive an “unfiltered message from markets”. Long-term bonds sold off sharply and have remained under pressure. The picture grew murkier still on August 19th when Scott Bessent, the treasury secretary, announced buy-backs of long-dated debt, an intervention intended in part to push down yields. So much for playing the ball.

But Mr Warsh quietly cleaned up some of the confusion he had created. He acknowledged that markets could never provide a perfectly “unfiltered” signal, since investors would naturally “try to anticipate what we will do next”. He affirmed—perhaps a little belatedly—that the Fed would carry on targeting PCE inflation. And he stated plainly what he had conspicuously avoided saying before: short-term interest rates remain the Fed’s principal tool for achieving its dual mandate, implicitly acknowledging that he could not rely on markets to do his job for him. Even on AI, a favourite theme, he conceded that prospective productivity gains had little bearing on the current policy conjuncture.

There are, it turns out, limits to saying less. Mr Warsh seems to have discovered them reluctantly: grumbling from markets pushed him into the change of approach. If he wants to keep bond markets as happy as they were when he sat down in Jackson Hole, transparency will have to become more of a habit. ■