Economist Paul Krugman Says Kevin Warsh "Sounded Utterly Conventional" at Jackson Hole, Despite Promising a Break From Fed Tradition. Does That Continuity Mean Rate Policy Won't Change Much Under Him?
Federal Reserve Chairman Kevin Warsh has spent months suggesting he wants to run the Fed differently. But after his first Jackson Hole speech as chairman, economist Paul Krugman came away with a very different conclusion.
Krugman said Warsh's Jackson Hole remarks sounded "utterly conventional," arguing that the new Fed chairman gave little indication that monetary policy would operate much differently under his leadership. That's particularly interesting because Warsh has been pushing for some fairly significant changes at the Fed, especially when it comes to communication.
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At Jackson Hole, he argued that the Fed's practice of providing forward guidance has "outstayed its welcome." Instead of constantly signaling where rates might go next, Warsh wants policymakers to retain more flexibility and put greater emphasis on incoming economic and market data. But his message on setting interest rates wasn't much different.
Warsh reaffirmed the Fed's 2% inflation target and, importantly, stuck with the Personal Consumption Expenditures Index as the Fed's preferred inflation gauge. That caught Krugman's attention because Warsh had previously floated the possibility of looking differently at how the Fed measures inflation.
Instead, Warsh called the 2% PCE target "firm" and "fixed." He also made it clear that inflation remains the bigger problem facing policymakers right now. July PCE inflation came in at 3.7% year over year, still well above the Fed's target. Meanwhile, Warsh described the labor market as broadly consistent with full employment. Put those together, and you don't exactly get a compelling argument for lower interest rates.
In fact, Warsh said the Fed needs to be confident inflation is moving toward 2% "clearly and at sufficient speed." Otherwise, policymakers still have work to do. Markets got the message. Following the speech, the probability of a September rate hike climbed to roughly 55%, up from around one-third the previous day.
Warsh may change how the Fed talks about interest rates without dramatically changing how the Fed sets them. He wants less forward guidance. He doesn't want markets hanging on every Fed forecast. And he appears skeptical that policymakers can reliably tell investors months in advance exactly what they'll do.
Those are meaningful changes. But none of them necessarily means the Fed suddenly abandons its traditional approach to inflation. If inflation remains well above 2%, policy stays restrictive. If inflation starts moving convincingly toward 2%, the Fed gets more room to cut. And if inflation accelerates again, rate hikes remain on the table. That's basically the same framework investors have been dealing with for years.
Krugman characterized Warsh's speech as essentially a "tight money until we see a lot better data" message. And I think that's probably the most useful way to look at it. Warsh may ultimately change the Fed's communication strategy, balance-sheet policies, and even some of its internal assumptions. But when it comes to interest rates, Jackson Hole suggested continuity rather than revolution. Indeed, for now, inflation is still running the show.
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