Warsh Warns on Inflation, Refuses Rate Signals

Federal Reserve Chairman Kevin Warsh used his first Jackson Hole speech Friday to warn that inflation is still running hot — and to refuse, pointedly, to say what he will do about it.

Warsh told the Fed's annual symposium in Jackson Hole, Wyoming, that "while this summer's PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved," according to CNBC's account of his remarks.

He gave no signal on where interest rates are headed and declined to spell out the conditions that would trigger a policy change. "I stand here today committed to a discipline, not to a decision," he said in prepared remarks.

The bigger message was about the Fed itself: Warsh called for a "quieter Fed, more purposeful in its communications."

What He Actually Said

Warsh dismissed forward guidance — the verbal cues chairmen have used for years to telegraph the Fed's intentions — as a practice that "has overstayed its welcome." Early in the speech he quipped, "You can call it an outline . . . you can call it a trail map . . . just don't call it forward guidance."

He also rejected the fallback demand from markets: a reaction function, meaning a stated rule for how the Fed would respond to hot or cold data. Warsh acknowledged the criticism directly, then said "our knowledge just doesn't extend that far—at least not yet—and the factors most relevant to the proper conduct of monetary policy change over time."

He promised his colleagues would "endeavor to construct more reliable models and more robust rules to guide policy decisions," while adding that "accuracy in economic forecasting is still just an aspiration."

On the Fed's role, he was blunter: "we should not indulge a regime in which market participants are looking primarily to the Fed for their next trade."

He did leave the door open on tightening, saying, "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do."