Federal Reserve Chair Kevin Warsh, speaking at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming, signaled a subtle change in his public posture on monetary policy communications. In his first formal address since taking the helm in May, Warsh stopped short of restoring full forward guidance but outlined enough of his thinking to alter market expectations about the trajectory of interest rates.
Warsh said the Fed must be "confident that underlying inflation is moving to our objective, clearly and at sufficient speed." He added plainly: "Otherwise, we have work to do." Those remarks, delivered to an audience that included global central bankers, were juxtaposed with his continued defense of a more restrained communications approach. "A quieter Fed, more purposeful in its communications, is better able to meet its objectives," he said.
The speech represented a departure from the extreme of silence Warsh has maintained since becoming chair. Market participants took his careful delineation of how he will assess inflation - which he described as a "reaction function" rather than a commitment - as material enough to reprice futures contracts and to shift bond and stock markets toward anticipating an interest rate increase at the Federal Open Market Committee meeting on September 15-16.
Warsh himself signaled he would not return to broad, prescriptive guidance. He prefaced his remarks with a lighthearted caveat: "You can call it an outline ... you can call it a trail map ... just don’t call it forward guidance." Even so, the detail he provided about the conditions that would prompt action offered markets a usable framework for assessing policy risk.
"Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed," Warsh said. "Otherwise, we have work to do."
Observers said the change was meaningful because it filled a vacuum that had existed since Warsh curtailed the Fed's prior practice of forward guidance at the June 16-17 meeting. That move to end explicit guidance was defended by several Fed officials as appropriate given uncertainty about the outlook. Yet the absence of a clear statement from the chair left other Fed officials to speak more openly about the possibility of future rate increases amid a string of inflation readings above the bank’s 2% target.
"We do have a better sense now of how Chairman Warsh is seeing the economy, and that is very helpful and very constructive," said Nathan Sheets, global chief economist at Citigroup, on a conference call after the speech. He added that Warsh's assessment was "a meaningful step forward compared to where we were coming out of the July press conference." That July 29 press conference followed the Fed’s decision to leave the policy rate unchanged in the 3.50% to 3.75% range.
Not all commentary was unequivocally favorable. Robert Tetlow, a research economist and former top Fed staffer, argued that Warsh's worry about guidance distorting market pricing may be overstated. Still, Tetlow said it was useful for the chair to explain his current economic assessment and noted that the assessment appeared "quite conventional."
Several regional Fed presidents and other officials have stressed the importance of communicating views as part of accountability and sound policymaking. New York Fed President John Williams supported the decision to end the prior forward guidance regime, saying it was "exactly the right call because the uncertainties are such that we didn’t have that confidence or conviction to say, well, it’s pretty clear which direction we’re going or how we’re thinking about the future."
Cleveland Fed President Beth Hammack said on Bloomberg TV that communicating her viewpoints is "a critical part of the job" and helps businesses and households form better expectations. Chicago Fed President Austan Goolsbee, in an interview on the podcast Rapid Response, similarly argued that without some explanation of how policymakers react to data, people will fill in their own assumptions and that can increase market volatility.
Former Philadelphia Fed President Patrick Harker, now a professor at the University of Pennsylvania’s Wharton School, warned that changes in rhetoric must ultimately be backed by policy choices. Noting that inflation has been above the Fed’s 2% target for almost six years, Harker said the Fed cannot continue to assert its mandate without taking the steps needed to achieve the target. "As the old saying goes, actions speak way louder than words," he added.
For market participants, the immediate effect of Warsh's speech was tangible. Futures markets, bond yields and equity prices shifted to reflect an increased probability of tighter monetary policy. That repricing suggests investors found the chair’s description of his decision framework both credible and actionable even as he resisted labeling it forward guidance.
Warsh’s calibrated communication appears to aim for a balance: retain the Fed’s preference for limited, purposeful public signaling while providing enough insight into policy thresholds to reduce guesswork. Whether markets and other Fed officials will view this approach as sufficient remains subject to further developments, including upcoming economic data and the policy decisions that follow.
What emerged in Jackson Hole was thus neither a wholesale return to the guidance regime of past crisis periods nor a continuation of the near-total reticence that characterized the early months of Warsh’s tenure. Instead, it was a narrowly defined set of criteria for action coupled with a rhetorical restraint that seeks to limit the distorting effects some officials associate with more explicit commitments.
Policy watchers and economists will be watching closely to see if subsequent Fed communications and decisions align with the standard Warsh articulated: clear evidence that underlying inflation is moving to the Fed’s objective at sufficient speed, or otherwise a willingness to "do the work" necessary to bring it there.