Editor's Note: At 22:00 Beijing time on August 28th, Federal Reserve Chairman Kevin Wash delivered a speech at the Jackson Hole Global Central Bankers' Symposium, marking his first address at this significant central banking forum since assuming the role of Fed Chair.
In his remarks, Kevin Wash stated that the "forward guidance" tool of unconventional times has fulfilled its mission in a normal economic environment and should be retired, emphasizing that monetary policy needs to return to data dependence and decision-making discipline.
Faced with the variable of the era—artificial intelligence—he acknowledged that its profound impact on productivity, the labor market, and the structure of capital returns remains largely unknown, necessitating cautious observation by the Fed. Simultaneously, he explicitly outlined seven guiding principles for policy implementation: anchoring the 2% inflation target, balancing the employment mandate, using short-term interest rates as the primary tool, paying attention to the quantity of money, and maintaining communication that is restrained and purposeful. These principles sketch a governance approach that returns to orthodoxy and avoids policy function overload.
Regarding his assessment of the situation, he believes the labor market is largely consistent with full employment, but inflation remains far above target—with PCE inflation running at 3.7% year-on-year, and more than half of its components rising above 3%. He pledged not to pre-determine the policy path but made it clear that unless convinced that inflation is moving towards the target at a clear pace, the Fed "has more work to do." The entire speech conveyed a stance where discipline takes precedence over specific decisions: making humble judgments amidst uncertainty and remaining resolute in the face of responsibility. Monetary policy stands at a new crossroads, and this Chairman chooses to win market trust with steadiness rather than aggression, with transparency rather than promises.
The full text of Kevin Wash's speech follows, translated by Odaily Planet Daily, Enjoy~
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Thank you. It's a pleasure to be back and to see so many familiar faces. I've been looking forward to this weekend—what better place to mark my 100th day as Chair of the Federal Reserve? For this generous hospitality, we all have to thank Kansas City Fed President Jeff Schmid and his team. Jeff, my thanks to you all.
Years ago, I learned that two very different types of hikes are possible on the trails around Jackson Hole. I can sum up my hikes with former Fed Vice Chair Don Kohn in two words: I survived. Those marathon-like "death marches" of iron willpower revealed a Don Kohn I was wholly unprepared to meet.
Then there's the other kind of hike—the kind I associate with my old colleague, former Fed Chair Ben Bernanke. Hiking with Ben is a far more leisurely affair, a gentle stroll on the winding paths of the Rockefeller Preserve.
So, before heading out, do a "wellness check" and ask yourself: "Is this a Kohn day, or a Bernanke day?"
The theme of this conference is innovation. I believe the public and the markets—with their collective wisdom—understand that innovation in how the Fed conducts policy will help achieve both full employment and price stability.
A brief overview of my remarks this morning. You can call it an outline... or a roadmap... but please don't call it 'forward guidance.'
First, I'll touch on some longer-term issues the Fed is contemplating, including the latest general-purpose technology—artificial intelligence (AI)—and where it might take the economy. Then, I'll discuss the practice of forward guidance and the interaction between central banks and financial markets. Next, I'll introduce some key principles I believe should guide monetary policy implementation. Finally, I'll offer my assessment of the current economic situation.
Preparing for Future Policy Turns
Against the backdrop of the eternal Teton Range, we come here to examine an economic landscape that is anything but static. Not long ago—on the eve of the 2008 crisis and in the decade that followed—economists and policymakers talked about "secular stagnation" and a "global savings glut." A widely held view then was that vast pools of capital would sit idle for a long time because there simply weren't enough compelling investment opportunities. It seemed like all the good things had already been invented.
Thus, growth would be subdued and slow. Well, times have indeed changed dramatically. We have arrived at an inflection point in history.
The most obvious example is the development of artificial intelligence—a name now 80 years old, describing the latest generation of technology—advancing even faster than predicted by its evangelists just a few years ago. The potential for the economy to achieve significantly higher growth is increasing. Expanding pools of capital are pouring into various AI-related infrastructure. A phenomenon akin to a "super Moore's Law" seems to be at play. Scaling laws are also changing, altering both the way and the speed of innovation.
Capital and labor combine to create the large language models at the heart of AI. Users purchase tokens for access to these models.
Reportedly, annualized token sales from just two leading AI labs now exceed $100 billion, up more than 500% from a year ago. The Federal Reserve is watching all of this closely.
We recognize that AI is a new variable—possibly even a new factor of production—that will impact the economy and the conduct of monetary policy.
This raises a host of important questions: Will the application of AI drive a significant and sustained increase in productivity across the economy? If so, when? Will token usage complement or compete with labor? Will next-generation AI models require higher capital intensity, or can the models themselves help design less capital-intensive solutions?
Another unresolved issue is the resulting market structure. We don't yet know where the returns to capital will ultimately land, nor how long the 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 will be the broad implications for workers and the Fed's employment goals?
Similarly, we don't know the equilibrium price of tokens. Will there be different types of tokens such that people are willing to pay more and more for access to the most cutting-edge, superior models? Will token prices for older models eventually fall to marginal cost?
To be clear, their recommendations will come later and will not affect our decisions in the current policy context. But I believe the intellectual investment we make today will better prepare us for tomorrow's policy challenges.
Forward Guidance and Its Alternatives
While our working groups are doing their work, I have not waited to begin introducing innovations at the Fed to adapt it for the future.
One example: I have already begun changing the form and function of what the Fed Chair calls "forward guidance." As you may know, I have long been uncomfortable with announcing future policy decisions prematurely.
I prefer another path... and I'll explain why.
Transparent communication about future policy decisions is not inherently virtuous. Communication must serve the Fed's most important responsibility: getting monetary policy right.
Forward guidance, as a regular policy tool, is something my colleagues and I adopted during the global financial crisis. It was crucial then, and we rolled it out with great fanfare. But, like other legacies from past crises, I believe forward guidance has outlived its useful purpose. In normal times, forward guidance should play a limited role and stay within well-defined bounds.
Otherwise, it can create confusion in the name of "clarity."
Over-disclosing the policy discussion process and making excessive promises about future decisions can mislead markets, businesses, and households. And I believe that when policymakers make quasi-commitments about rates throughout the policy cycle, we actually limit our freedom to make the right judgment when the time for a decision truly arrives.
To get policy right, we also need to properly manage the relationship between financial markets and the central bank. The Fed needs clear market signals, and they should be as unfiltered as possible, including market internals, the level and changes in asset prices across different markets and sectors, the price and volume of U.S. Treasuries, the foreign exchange value of the dollar, the cost and availability of credit, and the prices of a broad range of commodities. These and other indicators should help the Fed gauge short-term economic activity and inflation prospects throughout the economic cycle.
The Fed should remain humble but never naive. The Fed plays a crucial role in the economy and markets. Our policy tools are also powerful. We determine the path of short-term interest rates. Market participants will also always try to predict our next move. But we should not foster a mechanism where market participants rely primarily on the Fed to decide their next trade.
The economics literature has long described the distorting effects of such a mechanism, known as the "hall-of-mirrors problem." If markets heavily depend on Fed guidance, and the Fed depends on market prices, we all become more likely to miss new developments, more likely to be caught off guard when the situation turns, and more likely to make mistakes in the policymaking process.
Ironically, market participants may not bear the highest cost in the hall-of-mirrors problem. The most serious harm likely falls on those without financial assets. If the Fed misjudges inflation and misjudges the economy, who gets hurt the most? Not the winners in financial markets. It's hard-working Americans who have to contend with excessive inflation or suddenly less secure jobs.
So, if forward guidance isn't suitable for normal times, should the new Fed Chair at least commit to an explicit reaction function? For instance, should he tell us how rates will change if data come in hot or weak? I wish our understanding of the economy were precise enough to give a mechanical, well-validated answer—like strictly relying on a simple function such as the Taylor rule. But our knowledge isn't there yet—at least not now. And what matters most for implementing monetary policy correctly changes over time.
Predicting the Fed's reaction function works better in theory than in practice, better in the lab than in the real world. I'm not the only one who has noted, for example, that forward guidance in 2021 likely slowed the Fed'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 so while also being clear-eyed that the accuracy of economic forecasting remains aspirational. Geopolitics, global supply chains, and technology are changing so rapidly and dramatically that it's wise to maintain modest humility about what we can and cannot know. In that same spirit, we should be fully open to diverse perspectives on any issue that could influence Fed monetary policy decisions. If the goal is optimal decision-making, we should not shut out different views about the economic situation.
So, how do we find a better path for policymaking?
In the remainder of my remarks, I will share some key principles guiding my thinking on the appropriate conduct of monetary policy...
And then deliver on my promised assessment of the economic situation.
Key Principles
Here are those principles.
First, I note that in this work, yesterday's news can easily be mistaken for what's happening now. The challenge is to distinguish between the two. In other words, we must look at reality and ensure we're not making future-facing policy based on stale or inaccurate data. Nor should we rely on isolated data points. Trends matter most. The Fed is a decision-making body. We make choices under uncertainty, so the data we rely on must be as relevant, timely, accurate, and actionable as possible.
Second, the Fed acts to ensure aggregate demand is broadly aligned with aggregate supply. However, we can directly observe only economic activity. We can never directly see what's happening on the supply side; we can only infer. Therefore, assessing the current and future balance between aggregate supply and aggregate demand is inherently imprecise.
Third, it must be clear, with no room for misunderstanding, that the Fed's 2% price stability target, as measured by the PCE price index, is a firm and fixed target. Similarly, we must be clear about the other side of the coin: price stability is not automatic, and inflation does not necessarily subside on its own. Achieving price stability is the Fed's job.
Fourth, the Fed is equally responsible for achieving maximum employment. Over the medium term, fulfilling the dual mandate is not an either/or choice. I do not view the Fed's dual mandates as being in conflict. After all, high inflation itself undermines prosperity in serious ways.
Fifth, short-term interest rates are the primary tool for achieving the dual mandate. Unconventional policies aimed at stimulating economic activity are appropriate for genuine crisis periods but should be used sparingly otherwise, if at all.
Sixth, money matters. It may not be fashionable to talk about this today, but my view is: Money has an important relationship with monetary policy. We should pay attention to money created by the central bank, as well as money from the banking system and the financial system. Admittedly, financial innovation and other factors have changed the transmission mechanisms between the monetary base, velocity of money, and the broader economy. But that is hardly a reason to ignore how money ultimately affects financial conditions and prices.
Finally, a quieter, more purposefully communicating Fed is better positioned to achieve its goals. We can also be held accountable by whether we fulfill our responsibilities—that is the only real test of our credibility. To borrow a phrase from U.S. Air Force General Chuck Yeager: "When the moment of truth comes, either there's a reason or there's a result."
The Current Economic Situation
Now, how do I view today's economy through the lens of these principles? What's happening in the economy outside the window? You may have seen the unanimous view of the Federal Open Market Committee (FOMC) in the July minutes: the labor market remains solid, output is robust. But inflation remains too high.
I, along with most colleagues, believe the wiser course is to wait for new information between meetings—especially given potential developments in supply chains, investment flows, and geopolitics—before deciding whether a change in interest rate policy is necessary. We have also collectively expressed a willingness to act as conditions require. For my part, what strikes me today is the economy's overall performance. The economy appears to have strengthened somewhat.
One measure of an economy's strength is its resilience to shocks. On this score, both Main Street and Wall Street have shown remarkable resilience. Let me offer a few observations.
Business capital expenditure—the "seed corn" of future economic growth—is growing rapidly. The four-quarter change rate in equipment and intangible assets investment is around 9%, the highest pace since 2021. More than half of this year's capex growth is likely attributable to AI-related construction. For S&P 500 companies, profit growth over the past year exceeded 20%. Profit margins are quite high relative to historical levels. Overall stock market volatility is low. We are closely watching market internals, observing performance across sectors. Expectations for both capex and corporate earnings growth in the markets are quite elevated.
I will continue to monitor the changes in their growth rates—the second derivative of growth. The knock-on effects on asset prices, business confidence, consumer income, and spending are equally important to assess. Credit spreads for corporate bonds and leveraged loans are near the low end of their historical ranges, and issuance in these markets this year has been robust. Shifting focus from fixed income to banking, in the July Senior Loan Officer Opinion Survey on Bank Lending Practices, banks told us standards for commercial and industrial loans are on the easier side of their historical range, helping explain the growth in these loans this year.
Credit and loan markets show few signs of policy tightening. Certain sectors—like housing and agriculture—are under pressure. But broadly speaking, it would be hard for me to agree that financial conditions are notably restrictive. Despite various shocks, real consumer spending remains healthy, growing over 2% in the past four quarters. So far this year, PDFP (presumably a reference to a spending indicator) has grown nearly 3%. This indicator often contains more meaningful signals than GDP, and the trend here, too, is positive.
On the employment side of the Fed's dual mandate, our nation is doing well. The labor market is quite solid. The current unemployment rate of 4.1% remains low by historical standards and hasn't changed much in a few years. The four-week moving average of initial unemployment claims—an empirically tested, highly real-time indicator—is near multi-decade lows. In my view, the lower churn rate in today's labor market partly stems from the large-scale post-pandemic re-matching of employers and employees. When labor supply is hardly growing, monthly job gains will naturally be lower. There are always areas of concern in the labor market—for example, recent graduates. But overall, those who want to work are largely keeping or finding jobs.
They may worry about potential future labor market disruptions, but for now, I believe: The labor market is consistent with full employment. But on the price stability side of our dual mandate, the picture is more concerning. The Fed's preferred inflation gauge—the 12-month change in the PCE price index—currently stands at 3.7%, while the 6-month change is 4.1%. Corresponding measures for the Consumer Price Index (CPI) are also elevated, as are core measures for both PCE and CPI. None of these measures is perfect, but they all tell a similar story:
Inflation remains above our 2% target. Therefore, the Fed's primary focus at present should be prices. The task for policymakers is to capture underlying trend inflation—the broad-based change in prices across the economy, excluding idiosyncratic factors. We want to judge whether underlying inflation is rising, falling, or stuck. We want to know not just the direction but also the speed of change. All these broad inflation measures have come down substantially from their 2022 peaks.
To assess underlying 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 goods and services in the PCE basket saw price increases exceeding 3%. That share is well below the post-pandemic high—around 77%—but still significantly higher than the 32% average in the 20 years before the pandemic. Looking at just the past 6 months yields a similar conclusion: 49% of the goods and services in the PCE basket had annualized price increases exceeding 3%. Again, this is well below post-pandemic highs but remains at a fairly elevated level.
Recent broad-based increases in commodity prices are also worth noting. We need to judge whether these trends signify upside risks to inflation. Equally important is judging whether the inflation of the past five-plus years has seeped into inflation expectations. The good news is that medium-term inflation expectation measures look generally stable on balance. Inflation compensation measures in swap markets also send a strong and consistent message. Particularly given recent developments, market prices continue to show confidence that the Fed will achieve price stability—a testament to the institution and consistent with the Fed's best traditions.
I can assure you... they are right.
One feature of market-based inflation expectations, from economic history, is this: They tend to look very strong and stable right up until they become unanchored. These expectations aren't easily pushed around, and for now, they remain firmly anchored. But we must watch them closely. Ensuring inflation expectations do not become unanchored is the Fed's job. There is one signal no one can ignore: The responsibility for 65 months of elevated inflation falls squarely on the central bank. And that is where the responsibility belongs.
My standard is this: We must be confident that underlying inflation is moving toward our target, and at a clear and sufficient pace. Otherwise, we have more work to do. This is our job... our mission... our responsibility.
Conclusion
Standing here today, I am committing to a discipline, not a specific decision. My Fed colleagues and I are not the first to hold these positions at such a consequential moment. We are determined to use our time wisely, seize the moment, and do our best to do our jobs. We take our responsibility seriously, with humility and resolve. Too much depends on the choices we make. Sound monetary policy helps families and businesses thrive. When monetary policy is conducted effectively, it can broaden and deepen the economy's momentum... and help solidify America's leadership in the world.
I know our nation needs us to think carefully, judge prudently, and act wisely. It is the greatest honor to serve at the Fed once again. I am deeply grateful to my colleagues... and to many in this room for your encouragement and good counsel. Thank you for your attention this morning.
